The CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is.
B) it fails to consider the effects of new products in the marketplace.
C) the market basket actually selected is inappropriate.
D) the market basket fails to weigh housing costs sufficiently.

Question

Quizplus · Accepted Answer

The CPI (Consumer Price Index) tends to overstate the true inflation rate because it does not fully account for the introduction of new products. When new products enter the market, they often offer better quality or more features at the same or lower price, effectively increasing the value for consumers. The CPI, which measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, may not fully capture these improvements, leading to an overstatement of inflation as it measures the cost of a fixed basket of goods over time.

The CPI Tends to Overstate the True Inflation Rate Because