PRC-2 · Chapter 9 · Question 34 of 60
A known statistical flaw of the Laspeyres price index is its tendency to mathematically:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Overstate the true rate of inflation because it ignores the fact that consumers substitute away from expensive goods.
Explanation
Because Laspeyres rigidly uses older, fixed base-year quantities, it assumes consumers buy the exact same amount of a good even after its price skyrockets, typically causing it to overstate actual inflation.
More Indices MCQs
- Q36In economic statistics, the 'purchasing power of money' is strictly defined as:
- Q37When formulating a Paasche *Quantity* Index (rather than a price index), what data is utilized as the mathematical weighting factor?
- Q38Conversely, what does the Laspeyres *Quantity* Index exclusively use as its weighting factor?
- Q39Which of the following index calculation methods relies heavily on the use of sequential 'link relatives'?
- Q40What is a 'Value Index' designed to mathematically measure?