Substitution bias
A)is one factor that causes the CPI to underestimate the inflation rate.
B)is caused by the poor quality of many imported products.
C)is one of the primary causes of inflation.
D)involves consumer behaviour that helps explain why the CPI overestimates the inflation rate.

Question

Quizplus · Accepted Answer

Substitution bias occurs when consumers change their purchasing habits in response to changes in relative prices, opting for cheaper alternatives. The CPI may not fully account for this substitution, leading to an overestimation of the cost of living and thus the inflation rate.

Substitution Bias