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Question

Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct? a. The newspaper editorial is correct under all circumstances. b. The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI c. The newspaper editorial is incorrect under all circumstances. d. The newspaper editorial is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI.

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Solution By Steps

Step 1: Understanding CPI

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Itā€™s used to index Social Security payments for inflation.

Step 2: Analyzing the Claim

The editorial claims that low inflation harms Social Security recipients because their payments donā€™t increase as much. This assumes that the CPI accurately reflects the inflation experienced by Social Security recipients.

Step 3: Considering Different Inflation Rates

If the inflation rate for goods consumed by Social Security recipients is different from the overall CPI inflation rate, then the adjustments to Social Security payments may not accurately reflect their cost of living changes.

Step 4: Evaluating the Statements

Given the above, the correct statement is that the editorial could be correct if the inflation experienced by Social Security recipients (due to the goods they consume) differs from the CPI inflation rate.

Final Answer

b. The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI.

Key Concept

CPI Relevance

Key Concept Explanation

The Consumer Price Index (CPI) is crucial for adjusting payments to reflect inflation. However, its accuracy in reflecting individual experiences depends on how closely the consumerā€™s spending habits align with the goods and services the CPI measures. If thereā€™s a mismatch, the adjustments may not accurately represent changes in living costs for specific groups, such as Social Security recipients.

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