The CPI, which is a Laspeyres index, suffers from what economists call substitution bias. Thus, it tends to ______ the rate of inflation.
A) overstate
B) understate
C) not affect
D) none of the above

Question

Quizplus · Accepted Answer

The CPI, being a Laspeyres index, assumes a fixed basket of goods and services, ignoring consumers' ability to substitute cheaper goods for more expensive ones as prices change. This leads to an overstatement of the rate of inflation.

The CPI, Which Is a Laspeyres Index, Suffers from What