Suppose the CPI has been overstating the increase in the cost of living by 1% for 25 years,the total impact of that 25 years later is
A) less than 25%
B) exactly 25%
C) negligible since it is only 1% per year
D) more than 25%
E) 24%

Question

Quizplus · Accepted Answer

Overstating the increase in the cost of living by 1% for 25 years can compound to have a significant impact. Using the rule of 72, we can estimate that prices would double in 72/1=72 years without inflation. With 1% inflation, prices would double in 72/1=72 years. However, with 2% inflation, prices would double in 72/2=36 years. Therefore, the impact of a 1% overstatement in CPI for 25 years could result in prices being 100%/(36/25)=69.4% higher than they would have been without the overstatement. This is more than double the original value of 25%.

Suppose the CPI Has Been Overstating the Increase in the Cost