The Consumer Price Index (CPI):
A) tends to understate the impact of price changes.
B) tends to overstate the impact of price changes due to substitution bias.
C) is more accurate than the GDP deflator.
D) assumes that consumers substitute away from cheaper goods.

Question

Quizplus · Accepted Answer

The CPI tends to overstate the impact of price changes due to substitution bias. This is because it assumes that consumers will continue to purchase the same basket of goods and services even if prices change, but in reality, consumers often substitute cheaper goods for more expensive ones.