True/False: Last December, oil prices tumbled. Assume all other prices stayed the same. One can reasonably expect that the Consumer Price Index will overstate the change in the cost of living.

Answer:

False. The CPI should understate cost of living changes when prices decrease. Consider that people substitute towards products which use oil as an input. However, the CPI does not take this into account. (The general principle is that CPI does not take into account substitution effects.) What is true is that if the price of oil increased, the CPI would overstate the change in the cost of living.