QUESTION 29 Suppose manufacturers introduce a new model car

QUESTION 29 Suppose manufacturers introduce a new model car to replace a percent higher than the discontinued model, but the new car also includes additional safety features. In this situation the CPI will tend to bias inflation as a result of A. understate; substitution B. overstate; substitution C. overstate, quality adjustment D. understate; quality adjustment

Solution

Option C.

As the price of the new car is more than the discontinued model because of the quality bias over time, the CPI gets overstated as the improvements does not get reflected in CPI adjustments.