PRC-2 · Chapter 9 · Question 14 of 60
A fundamental characteristic of the Laspeyres Index is that it tends to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Slightly overstate inflation by ignoring consumer substitution to cheaper goods.
Explanation
Because Laspeyres uses fixed base-year quantities, it assumes consumers buy the exact same basket of goods regardless of price changes. It ignores the reality that consumers substitute away from expensive goods, thereby usually overstating living costs.
More Indices MCQs
- Q16What is a defining characteristic of the Laspeyres price index regarding its denominator?
- Q17Why is the Laspeyres price index typically used more frequently in practical economic applications than the Paasche price index?
- Q18Which of the following statements accurately describes a chain index series?
- Q19The Consumer Price Index (CPI) is fundamentally designed to mathematically measure:
- Q20If an inflation price index is calculated as 116 in the current year with a base year index of 100, what is the precise interpretation?