Suppose there are only two goods (Good A and Good B) and the average person buys 4 of Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the Price of Good B is $10, and in the next year the Price of Goods A and B both increase by 5% at the same stores, But, Good A is much less likely to make you sick than it had been. What is the problem with the CPI way of calculating inflation that is apparent?
A. It understates the importance of Good B in the budget.
B. It fails to recognize the quality increase in Good A therefore the CPI understates the degree of inflation.
C. It understates the importance of Good A in the budget.
D. It fails to recognize the quality increase in Good A and therefore the CPI overstates the degree of inflation.
Answer: D
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