One of the limitations of the basic CPI is that it does not measure inflation well for groups that do not purchase the market basket used to calculate price changes. This limitation of the basic CPI is referred to by which of the following terms?(1 point)

Question

Responses

the chained CPI problem
the chained CPI problem

the index number problem
the index number problem

the substitution effect problem
the substitution effect problem

the core CPI problem

Answer 1

The limitation of the basic CPI you are referring to is called the substitution effect problem. This issue arises because the CPI is based on a fixed market basket of goods and services, which does not account for changes in consumer behavior when prices change (such as substituting one product for another).