The consumer price index overestimates inflation because it
A)Compares prices of what consumers actually buy rather than a fixed basket of goods
B)Allows consumers to move along a given indifference curve from one year to the next
C)Measures the cost of a market basket in the second year that has too many units of the most inflated items
D)Uses the second year's market basket as the base rather than the first year's basket

Question

Quizplus · Accepted Answer

The consumer price index may overestimate inflation if it measures the cost of a market basket in the second year that has too many units of the most inflated items. This can lead to an overestimation of the overall price level, as the weighting of the most inflated items will be higher than their actual share of consumer spending.

The Consumer Price Index Overestimates Inflation Because It