Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ________ inflation as a result of ________ bias.
A)overstate; substitution
B)understate; substitution
C)accurately measure; substitution
D)overstate; quality adjustment

Question

Quizplus · Accepted Answer

When prices rise sharply for a product, consumers shift away from it. Since the CPI uses a fixed basket of goods and services, this switching between substitute products is often missed, resulting in "substitution bias" and overstatement of the CPI.

Suppose That the Price of Chicken Rises Sharply Compared to the Price