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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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BuyFindarrow_forward

Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 11, Problem 2QR
Textbook Problem
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Describe the three problems that make the CPI an imperfect measure of the cost of living.

To determine
Reason whyCPI is an imperfect measure of the cost of living.

Explanation of Solution

The CPI is an imperfect measure of the cost of living for three reasons. They are as follows:

  1. (1) Substitution bias: It does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time...

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