A Laspeyres price index tends to: A. understate the inflation rate because its market basket is fixed. B. overstate the inflation rate because its market basket is variable. C. overstate the inflation rate, because its market basket is fixed.
A Laspeyres price index tends to overstate the inflation rate because it uses fixed market basket weights from a base period. This does not consider that consumers will substitute away from goods that have risen dramatically in price.
