Suppose a new computer model is introduced to replace a model included in the CPI basket. The price of the new

Question

Suppose a new computer model is introduced to replace a model included in the CPI basket. The price of the new model is 5 percent higher than the discontinued model, but the new model also includes additional features. In this situation the CPI will tend to _____ inflation as a result of _____ bias.

A. overstate; substitution

B. understate; substitution

C. accurately measure; substitution

D. overstate; quality adjustment

E. understate; quality adjustment

Answer 1

D. overstate; quality adjustment