Question

If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as:

a) $25.00 purchased in 1975.

b) $33.33 purchased in 1975.

c) $40.00 purchased in 1975.

d) $135.55 purchased in 1975.

Answer 1

$100 today is equivalent to purchasing the same amount of goods and services as $40 did in 1975 according to the CPI values given. This comparison illustrates the concept of inflation and how it affects purchasing power over time.

Step-by-step explanation:

The CPI (Consumer Price Index) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The question involves comparing the purchasing power of money between two different periods using the CPI as a basis for comparison.

To calculate the equivalent value of $100 today in 1975 dollars, we use the formula: (Old CPI / New CPI) x Present Value. Plugging in the values we get (90 / 225) x $100 = $40. Therefore, $100 today purchases the same amount of goods and services as $40 purchased in 1975.

This calculation demonstrates the effect of inflation and how it erodes the purchasing power of money over time. Understanding CPI and inflation is critical in areas such as economics, finance, and for general financial literacy.