Suppose There Are Only Two Goods (Good a and Good

question 61

Multiple Choice

Suppose there are only two goods (Good A and Good B) and the average person buys 4 of Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the Price of Good B is $10, and in the next year the Price of Good A is $4 and the Price of Good B is $12, one problem with the CPI way of calculating inflation is

• A)it understates the importance of Good A in the budget.
• B)it understates the importance of Good B in the budget.
• C)it fails to recognize that people will substitute (to some degree)Good A for Good B and therefore overstates the degree of inflation.
• D)it fails to recognize that people will substitute (to some degree)Good A for Good B and therefore understates the degree of inflation.

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