The substitution bias in the CPI arises because the CPI:
A)is based on a fixed basket of goods and services.
B)does not adequately allow for improvements in products.
C)measures prices at two different times.
D)understates the "true" rate of inflation.

Question

Quizplus · Accepted Answer

The CPI uses a historical market basket of goods so the index will not reflect any substitution that has occurred and, thus, overstates inflation.

The Substitution Bias in the CPI Arises Because the CPI