Social Security Payments Are Indexed for Inflation Using the CPI

question 41

Multiple Choice

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 is correct if the market basket consumed by Social Security recipients is the same as the market basket used to compute the CPI.
• C)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
• D)The newspaper editorial is incorrect under all circumstances.

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Definitions:

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from total revenue.

Present Value Factor

A factor used in the calculation of the present value of cash flows, based on a specific rate and number of periods.

Net Present Value

A financial metric that calculates the difference between the present value of cash inflows and outflows over a period of time.

Present Value Index

The Present Value Index is a financial metric used to evaluate the viability of a project or investment by comparing its present value of future cash flows to the initial investment.