Price of bread rises relative to the price of rice

Reference no: EM13700868

Suppose that the CPI includes two goods, rice and bread which are substitutes. If the year after the base year the price of bread rises relative to the price of rice then

1. The weight the CPI places on rice will be lower than actual expenditures indicate, so the inflation rate will be overstated.

2. The weight the CPI places on rice will be higher than actual expenditures indicate, so the inflation rate will be overstated.

3. The weight the CPI places on rice will be lower than actual expenditures indicate, so the inflation rate will be understated.

4. The weight the CPI places on rice will be higher than actual expenditures indicate, so the inflation rate will be understated.

Reference no: EM13700868

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