As Inflation Drives Up Prices, People Attempt to Find Substitutes

question 176

Multiple Choice

As inflation drives up prices, people attempt to find substitutes and adjust what they buy. The resulting substitution bias problem causes the CPI to

• A) overstate the impact of higher prices on consumers.
• B) consistently underestimate the true inflation rate.
• C) omit the benefits of product quality improvements.
• D) have larger fluctuations than other price indexes.

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Definitions:

Flexible Budget

A financial plan that is designed to change in response to the level of activity achieved.

Spending Variance

The difference between the actual amount spent and the budgeted amount for a period.

Employee Salaries and Wages

The payment made to employees for their services, either calculated hourly (wages) or over a fixed period (salaries).

Spending Variance

The difference between the actual amount spent and the budgeted amount for a particular period or category in financial management.