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:

Cash Dividend

This form of profit distribution by companies involves transferring cash to shareholders, typically determined by the board of directors.

Patent Amortization

The process of gradually writing off the initial cost of a patent over its useful life, reflecting its consumption or expiration.

Indirect Method

The indirect method is an approach used in cash flow statements to adjust net income for changes in non-cash accounts to calculate net cash provided by operating activities.

Indirect Method

A way of presenting a cash flow statement where net income is adjusted for changes in balance sheet items to reflect cash transactions.