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Esther notes that suppose the CPI based inflation is estimated at 2.53%; the true inflation is...

Esther notes that suppose the CPI based inflation is estimated at 2.53%; the true inflation is around

Select one:

a. 2%

b. 3.3%

c. 2.53%

d. None of the above

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Answer #1

Correct option is (a).

CPI-based inflation overstates actual inflation rate, because of substitution bias, quality bias and new-product bias, since CPI does not consider substitution of goods by consumers, introduction of new goods or improvement in quality. So actual inflation should be lower than CPI-based inflation. Only option (a) shows actual inflation that is less than CPI-based inflation rate of 2.53%.

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