Question

The substitution bias in the consumer price index refers to the Group of answer choices substitution by consumers toward new goods and away from old goods. substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

Answer 1

The correct answer is: substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.

Step-by-step explanation:

The CPI or consumer price index measures the change in the general price level through a basket of commodities that are generally purchased by the consumers.

The CPI does not always correctly estimate the inflation rate. This is because CPI does not include changes in the quality or substitution of expensive goods for cheaper ones.

When the price of a commodity increase, the consumers will substitute it for its cheaper substitute. So consumer spending will not change. But the CPI will increase as it will not include this substitution. The CPI will thus overestimate inflation.