ECONOMICS
GDP
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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I only
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I and II only
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I, II, and III only
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I, II, IV only
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I, II, III, and IV
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Detailed explanation-1: -The substitution bias causes an inflation rate calculated using a fixed basket of goods over time to overstate the true rise in the cost of living because it does not take into account that people can substitute away from goods whose prices rise disproportionately.
Detailed explanation-2: -The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to overstate the true cost of living. The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices.
Detailed explanation-3: -The consumer price index (CPI) tends to overestimate the cost of living because it uses a fixed basket of goods and services and does not take into account substitution of items when their relative prices change.
Detailed explanation-4: -The consumer price index is an imperfect measure of the cost of living for the following three reasons: substitution bias, the introduction of new goods, and unmeasured changes in quality. Because of measurement problems, the CPI overstates annual inflation by about 1 percentage point.