A fixed-weight price index like the CPI ______ the change in the cost of living because it ______ take into account that people can substitute less expensive goods for ones that have become more expensive.
A) underestimates; does not
B) overestimates; does
C) accurately estimates; does
D) overestimates; does not

Question

Quizplus · Accepted Answer

A fixed-weight price index like the CPI overestimates the change in the cost of living because it does not take into account that people can substitute less expensive goods for ones that have become more expensive. This lack of substitution bias means that the CPI may not accurately reflect how consumers adjust their spending in response to price changes.

A Fixed-Weight Price Index Like the CPI ______ the Change