A Price Index Like the CPI, Which Uses a Fixed

question 206

Multiple Choice

A price index like the CPI, which uses a fixed basket of goods from one year to the next, will tend to overstate inflation because

• A) producers are likely to change the number of goods they sell from year to year.
• B) producers will generally reduce the quality of goods as prices increase over time.
• C) consumers will tend to substitute away from goods that become more expensive.
• D) consumers will usually reduce their consumption of goods when they become relatively cheaper.

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Definitions:

General Ledger

A comprehensive set of accounts that records all transactions of a business, providing the foundation for financial statements.

General Ledger

The main accounting record of a company which uses double-entry bookkeeping, consisting of all balance sheet and income statement accounts.

Sales Journal

A specific type of journal used to record the sales of goods or services on credit.

General Journal

An accounting ledger where all types of transactions are initially recorded before being transferred to specific accounts.