Which of the following means that the CPI overstates the actual inflation rate?
A) new goods bias
B) quality change bias
C) outlet substitution bias
D) All of the above cause the CPI to overstate inflation.

Question

Quizplus · Accepted Answer

All of the options listed contribute to the Consumer Price Index (CPI) overstating the actual inflation rate. New goods bias occurs when new products are not immediately included in the CPI basket, missing the period where their prices might be falling. Quality change bias happens when improvements in product quality are not fully adjusted for, making it seem like prices are rising when consumers might actually be getting more value for their money. Outlet substitution bias arises when consumers switch to cheaper outlets or products but the CPI does not fully account for this switch, thus overstating inflation by not fully capturing where and how consumers are actually spending their money.

Which of the Following Means That the CPI Overstates the Actual