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Question
Macroeconomics
Posted 3 months ago
Which of the following best explains why the consumer price index (CPI) may not accurately measure changes in the cost of living?

Choose 1 answer:
(A) When prices of some goods go up, consumers buy less of those and more of goods that are cheaper
(B) It only includes goods purchased every day
(C) It does not account for changes in consumers' incomes
(D) When real GDP increases, the CPI doesn't change
(E) It doesn't include all prices, such as input costs to firms
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Answer from Sia
Posted 3 months ago
A
Key Concept
Substitution Bias
Explanation
The CPI may not accurately measure changes in the cost of living because it does not fully account for the substitution effect, where consumers may change their purchasing habits when prices of certain goods increase, opting for cheaper alternatives.

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