Substitution bias in the CPI refers to the fact that the CPI
A) takes no account of the substitution of goods by consumers when relative prices change.
B) substitutes relative prices for absolute prices of goods.
C) substitutes quality changes whenever they occur without taking account of the cost of the quality changes.
D) takes into account the substitution of goods by consumers when relative prices change.

Question

Quizplus · Accepted Answer

Substitution bias in the CPI refers to the fact that the CPI takes no account of the substitution of goods by consumers when relative prices change. This can lead to an overestimation of inflation as consumers may switch to cheaper goods when the price of a particular good increases.

Substitution Bias in the CPI Refers to the Fact That