If there is a 5 percent increase in the CPI, then there will most likely be
A)a 5 percent rise in the cost of living.
B)a less than 5 percent rise in the cost of living because of consumers substituting away from goods whose relative prices rise towards other goods.
C)a more than 5 percent rise in the cost of living because of consumers substituting away from goods whose relative prices rise towards other goods.
D)a less than 5 percent rise in the cost of living because of falling quality of goods over time.
E)a more than 5 percent rise in the cost of living because of the introduction of new goods.

Question

Quizplus · Accepted Answer

The substitution effect suggests that consumers will switch to cheaper alternatives when prices rise, leading to a less than proportional increase in the cost of living compared to the CPI increase.

If There Is a 5 Percent Increase in the CPI