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Why Does the Substitution Bias Cause the Consumer Price Index

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Essay

Why does the substitution bias cause the consumer price index to overstate inflation and the cost of living? Why does the increase in quality bias cause the consumer price index to overstate inflation and the cost of living?


Definitions:

Indicator Variables

Variables used in statistical models that take the value 1 if a certain condition is met and 0 otherwise, often used for representing categorical data.

Seasonal Variations

Periodic fluctuations in time series data that occur at regular intervals due to seasonal factors.

Stock Market Performance

An indicator of the overall health and activity of the stock market, often reflected through indexes like the Dow Jones or S&P 500.

Cyclical Variation

A pattern in time series data that occurs over longer periods and is often related to economic or business cycles.

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