Welfare Payments Are Indexed for Inflation Using the CPI

question 51

Multiple Choice

Welfare payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that welfare recipients are harmed by inflation as it is measured by the CPI. Is the newspaper editorial correct?

• A) The newspaper editorial is correct if the price of the basket consumed by welfare recipients increases faster than the price of the CPI basket.
• B) The newspaper editorial is correct if the price of the basket consumed by welfare recipients increases slower than the price of the CPI basket.
• C) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients are cheaper than the goods in the CPI basket.
• D) The newspaper editorial is correct if the prices of the goods consumed by welfare recipients are more expensive than the goods in the CPI basket.

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Definitions:

Canadian Dollar

The official currency of Canada, often symbolized as CAD, which fluctuates in value on the foreign exchange market.

Euro

The Euro is the official currency of 19 out of the 27 European Union countries, known collectively as the Eurozone, and acts as one of the world’s major currencies.

Interest Rate Parity

Interest rate parity is an economic theory that suggests the difference between the interest rates of two countries is equal to the differential between the forward exchange rate and the spot exchange rate of their currencies.

Forward Rate

The predetermined rate at which two parties will exchange currencies on a future date, agreeing upon it in the present.