Which of the following would be a consequence of substitution bias in the CPI?
A)Social Security payments would not adequately compensate retired workers for inflation.
B)Businesses would overcompensate employees for inflation when giving the cost of living rises.
C)The inflation rate based on the CPI would underestimate the true level of inflation.
D)Judges would award child support payments that would not adequately keep up with the true cost of inflation.
E)Economists make errors in estimating inflation when using substitutes for the CPI such as GDP deflator.

Question

Quizplus · Accepted Answer

Substitution bias in the CPI occurs when consumers switch to cheaper alternatives as prices change, but the CPI does not fully account for this behavior, leading to an overestimation of inflation. Consequently, businesses might overcompensate employees for inflation.

Which of the Following Would Be a Consequence of Substitution