Substitution Bias in the CPI Refers to the Fact That

question 75

Multiple Choice

Substitution bias in the CPI refers to the fact that the CPI

• A) takes no account of the substitution of goods by consumers when relative prices change.
• B) substitutes relative prices for absolute prices of goods.
• C) substitutes quality changes whenever they occur without taking account of the cost of the quality changes.
• D) takes into account the substitution of goods by consumers when relative prices change.

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Definitions:

Inferior Good

A type of good whose demand decreases when consumer incomes increase.

Normal Good

An item that sees a rise in desire when the income of buyers increases, and experiences a decline in demand when the income of buyers drops.

Consumer Expectations

Anticipations of future prices, product quality, or available services that influence consumer decisions on spending and saving.

Normal Goods

Goods for which demand increases as consumer income rises, making them positively correlated with income changes.