Suppose That the Computation of a Price Index Were to Give

question 4

Multiple Choice

Suppose that the computation of a price index were to give energy consumption a 20 percent weight over the decade from 1973 through 1982. Suppose further that conservation during that time actually reduced the share of expenditure on energy while the relative price of energy rose. It could be concluded, in this case, that

• A) changes in the index would be an accurate measure of the rate of inflation affecting household budgets.
• B) changes in the index would overestimate the rate of inflation affecting household budgets.
• C) changes in the index would underestimate the rate of inflation affecting household budgets.
• D) the index would not change at all.
• E) none of the above can be determined from the information provided.

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