The Consumer Price Index (CPI):
A)Tends to understate the impact of price changes
B)Tends to overstate the impact of price changes due to substitution bias
C)Is more accurate than the GDP deflator
D)Assumes that consumers substitute away from cheaper goods

Question

Quizplus · Accepted Answer

The CPI tends to overstate the impact of price changes due to substitution bias. This is because it does not account for consumers switching to cheaper goods when prices of their preferred goods increase.