Which of the following answers would accurately describe the bias in the CPI resulting from the fact that oil prices suddenly increase?
A) The CPI would underestimate the cost of living.
B) The CPI would overestimate the cost of living.
C) The CPI would not be biased as a result of a sudden rise in oil prices.
D) The CPI could overestimate or underestimate the cost of living, depending upon the quantity of oil purchased in that year.

Question

Quizplus · Accepted Answer

The CPI would overestimate the cost of living because the index includes energy costs, and a sudden increase in oil prices would cause an increase in the price level of many goods and services. However, this increase in price level is not necessarily indicative of an increase in the cost of living for the average consumer.

Which of the Following Answers Would Accurately Describe the Bias