Suppose hypothetically that you buy a lot of food such as tofu, veggie burgers, and organic fruit that are not included in the market basket used to compute the CPI. In addition, suppose that all of these goods have become cheaper over the last year, while the overall CPI has increased by 6 percent. Then which of the following is true ?
A) The CPI will understate the negative impact of inflation on your purchasing power and standard of living.
B) The CPI will still accurately state the negative impact of inflation on your purchasing power and standard of living.
C) The CPI will overstate the negative impact of inflation on your purchasing power and standard of living.
D) Inflation has a larger effect on your standard of living than on the average consumer.

Question

Quizplus · Accepted Answer

The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. If the specific goods you buy (like tofu, veggie burgers, and organic fruit) have become cheaper while the overall CPI has increased, the CPI would overstate the negative impact of inflation on your purchasing power and standard of living, because it does not reflect the decrease in prices of the specific goods you consume.

Suppose Hypothetically That You Buy a Lot of Food Such