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:

Guaranteeing Month-end

ensuring financial or operational activities are completed or accounted for at the end of each month.

20-year Annuity

A financial product that provides a stream of payments to the holder for a period of 20 years.

Future Value

The value of a current asset at a specified date in the future based on an assumed rate of growth or interest.

Ordinary General Annuity

An annuity in which the payment interval does not equal the compounding interval, and payments are made at the end of each payment interval.