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 the above.

Question

Quizplus · Accepted Answer

The substitution bias occurs when consumers change their purchasing habits due to changes in relative prices, but the CPI does not fully account for this, leading to an overstatement of the true rate of inflation.

The Substitution Bias Is Believed to Cause the Consumer Price