The consumer price index (CPI) is calculated
A) using a fixed basket of goods and, therefore, will tend to understate inflation.
B) using a fixed basket of goods and, therefore, will tend to overstate inflation.
C) using a constantly changing basket of goods and, therefore, will tend to understate inflation.
D) using a constantly changing basket of goods and, therefore, will tend to overstate inflation.

Question

Quizplus · Accepted Answer

The CPI uses a fixed basket of goods, which can lead to an overstatement of inflation due to not accounting for substitution bias, where consumers may switch to cheaper alternatives as prices change.

The Consumer Price Index (CPI) Is Calculated