The "substitution bias" of the CPI refers to the fact that the CPI measures the change in expenditures necessary to consume a fixed basket of goods, whereas in reality the optimal consumption basket changes as prices change.

Question

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The statement accurately describes the concept of substitution bias in the CPI. This is correct. The substitution bias of the CPI arises because the CPI assumes that consumers will continue to purchase the same basket of goods even as prices change, whereas in reality consumers may switch to cheaper alternatives. This can lead to an overestimation of inflation because the CPI does not reflect the full impact of consumers' ability to substitute cheaper goods for more expensive ones.

The "Substitution Bias" of the CPI Refers to the Fact