Question

One factor that complicates the calculation of the inflation rate is:
A. substitution (quality/new product) bias.
B. complementary product bias.
C. consumer behavior bias.
D. preferential bias.

Solution

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Answered 4 months ago
Answered 4 months ago

The obvious correct choice that we would choose here is option "A".

When we calculate the inflation rate for a given fixed basket of goods, it is really hard to take into account that consumers tend to substitute certain goods with each other if there are changes in the price level which overestimates the cause of the inflation.

For example, if the price of coffee drinks has risen to the point that it is really expensive to consume that commodity, the consumers may decide to start drinking black or green tea.

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