A Social Security recipient's buying power is reduced as a result of inflation,so she tries to save money by buying cheaper alternatives to her normal purchases.This behavior is factored into calculation of

Question

​A Social Security recipient's buying power is reduced as a result of inflation,so she tries to save money by buying cheaper alternatives to her normal purchases.This behavior is factored into calculation of

Quizplus · Accepted Answer

The behavior of buying cheaper alternatives to normal purchases to save money is known as substitution bias, which is factored into the calculation of the chained CPI. The chained CPI takes into account consumer behavior by assuming that people will substitute cheaper alternatives when prices increase, and therefore provides a more accurate measure of inflation. This is in contrast to the traditional CPI, which assumes that people will continue to purchase the same goods even as prices rise. The COLA (Choice A) is the cost-of-living adjustment made to Social Security payments each year to account for inflation, but it does not factor in substitution bias. The Social Security Trust Fund (Choice C) is the fund that holds the assets of the Social Security system, but it is not directly related to inflation measurement. The poverty level (Choice E) is a measure of income below which a person or household is considered to be living in poverty, and is not directly related to inflation measurement.

​A Social Security Recipient's Buying Power Is Reduced as a Result

A Social Security Recipient's Buying Power Is Reduced as a Result