As the price of gasoline rose during the 1970s, consumers cut back on their use of gasoline relative to other consumer goods. This situation contributed to which bias in the consumer price index?

Question

Quizplus · Accepted Answer

The situation described relates to substitution bias, which occurs when consumers change their consumption patterns in response to changing relative prices of goods and services. As consumers shifted away from gasoline due to its increasing price, this affected the overall CPI calculation, as it assumes a fixed basket of goods and services. Therefore, substitution bias arises when consumers substitute goods at different rates than those assumed by the CPI, leading to an over- or understatement of the inflation rate.

As the Price of Gasoline Rose During the 1970s, Consumers