Before the adoption of a chain-weighted price index in the United States, the payments based on changes in the Consumer Price Index (CPI) tended to be:
A) too large, because the system used a Paasche index.
B) too large, because the system used a Laspeyres index.
C) too small, because the system used a Paasche index.
D) too small, because the system used a Laspeyres index.

Question

Quizplus · Accepted Answer

The system used a Laspeyres index, which tends to overstate inflation because it does not account for changes in consumer behavior in response to price changes, leading to payments that are too large.

Before the Adoption of a Chain-Weighted Price Index in the United