Final answer:
The 'quality/new goods bias' arises when calculating the inflation rate based on a fixed basket of goods because it does not account for improvements in the quality of existing goods or the invention of new goods, leading to an overstatement of the consumer's true cost of living.
Step-by-step explanation:
The 'quality/new goods bias' arises when calculating the inflation rate based on a fixed basket of goods because it does not account for improvements in the quality of existing goods or the invention of new goods. This bias tends to overstate the true rise in the cost of living. For example, if the price index does not include new goods that offer better value for money, it overlooks one of the ways in which the cost of living is improving. Additionally, the price of a new good is often higher when it is first introduced and then declines over time. If the new good is not included in the inflation rate calculation until its price is already lower, the calculation may miss counting this price decline altogether. Therefore, the inflation rate based on a fixed basket of goods over time tends to overstate the consumer's true cost of living.