The substitution bias is believed to cause the consumer price index to:
A)overstate the true rate of inflation.
B)understate the true rate of inflation.
C)understate the true GDP deflator.
D)none of these.

Question

Quizplus · Accepted Answer

The substitution bias occurs when consumers switch to cheaper alternatives as prices change, but the CPI does not fully account for this behavior, leading to an overstatement of the true rate of inflation.

The Substitution Bias Is Believed to Cause the Consumer Price