Price changes from year to year are not proportional, and consumers respond to these changes by...
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Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called
a. deflation.
b. substitution bias.
c. inflation.
d. unmeasured quality change.
Homework Answers
Answer
Option b
substitution bias
The spending pattern changes but it is not completely adjusted with the CPI so the inflation rate is different than the original because of the problem of substitution bias.
Deflation is a reduction in the price level and inflation is an increase in the price level.
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