Questions: The substitution bias Select the correct answer below: causes the U.S. Bureau of Labor Statistics to underestimate inflation has no effect on the cost of living leads to a loss of purchasing power helps explain why the CPI overestimates inflation

The substitution bias Select the correct answer below: causes the U.S. Bureau of Labor Statistics to underestimate inflation has no effect on the cost of living leads to a loss of purchasing power helps explain why the CPI overestimates inflation
Transcript text: The substitution bias Select the correct answer below: causes the U.S. Bureau of Labor Statistics to underestimate inflation has no effect on the cost of living leads to a loss of purchasing power helps explain why the CPI overestimates inflation
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Solution

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Solution Steps

Step 1: Identify the Question

The question asks about the substitution bias and its effect on the Consumer Price Index (CPI).

Step 2: Understand Substitution Bias

Substitution bias occurs when consumers change their purchasing habits due to changes in relative prices, but the CPI does not fully account for this behavior.

Step 3: Analyze the Options
  • Causes the U.S. Bureau of Labor Statistics to underestimate inflation
  • Has no effect on the cost of living
  • Leads to a loss of purchasing power
  • Helps explain why the CPI overestimates inflation
Step 4: Determine the Correct Answer

Substitution bias typically leads to the CPI overestimating inflation because it does not account for consumers switching to cheaper alternatives when prices change.

Final Answer

Helps explain why the CPI overestimates inflation

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