The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418. The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68. The real cost of a gallon of gasoline between 1972 and 2005:
A) increased.
B) decreased.
C) remained constant.
D) may have either increased or decreased.

Question

Quizplus · Accepted Answer

To calculate the real cost of a gallon of gasoline, we need to adjust for inflation using the CPI. We can calculate the inflation rate between 1972 and 2005 as follows:

Inflation rate = (CPI in 2005 - CPI in 1972) / CPI in 1972
= (1.68 - 0.418) / 0.418
= 3.019

This means that prices have increased by a factor of 3.019 since 1972. To find the real cost of gasoline in 2005 dollars, we need to multiply the nominal cost of gasoline in 1972 by the inflation rate:

Real cost of gasoline in 2005 dollars = $0.35 x 3.019 = $1.05565

Since the nominal cost of gasoline in 2005 was $2.25, we can see that the real cost of gasoline has increased. Therefore, the best choice is A) increased.

The Price of a Gallon of Gasoline Was $0