Which of the following statements is correct?
A)The Paasche price index is always equal to the Laspeyres price index during periods of inflation.
B)The Laspeyres price index tends to underestimates price increases during periods of inflation.
C)The Paasche price index tends to overestimates price increases during periods of inflation.
D)The Laspeyres price index tends to overestimate price increases during periods of inflation.

Question

Quizplus · Accepted Answer

During periods of inflation, the Laspeyres price index tends to overestimate price increases because it uses a fixed base-year quantity weight. This means that it does not account for consumers' substitution of cheaper goods when prices rise, resulting in an overestimation of the cost of a constant basket of goods. The Paasche price index, on the other hand, tends to underestimate price increases during periods of inflation because it uses a fixed base-year price weight, which does not account for changes in relative prices over time. Therefore, statement A and C are incorrect, and statement B is the opposite of the correct explanation.

Which of the Following Statements Is Correct