Suppose Manufacturers Introduce a New Model Car to Replace a Car

question 46

Multiple Choice

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

• A)overstate; substitution
• B)understate; quality adjustment
• C)accurately measure; substitution
• D)overstate; quality adjustment

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Definitions:

Apartment Building

A residential building containing multiple apartments for rent.

Business Revenue

The total income generated by a company from its normal business operations before any expenses are subtracted.

Percent Reduced

A measure of how much a number or value is decreased expressed as a percentage.

Post-Christmas Sale

A marketing event where retailers offer significant discounts on merchandise following the Christmas holiday to reduce inventory.