Social Security benefits are increased each year in proportion to the increase in the CPI, even though most economists believe that the CPI overstates actual inflation.

a. True
b. False

The correct answer is letter "A": True.

Explanation:

The Consumer Price Index (CPI) gives an idea of household expenditures on basic staples according to a fixed basket of goods. CPI is one of the most common economic indicators that measure consumer prices. When economists say the CPI overstates inflation they mean there are factors driven by changes in consumer behavior that are not included in the CPI making it imperfect. That deviation is estimated to be 1% annually.

Thus, Social Security benefits are indeed measured by the CPI to find out how much elders' basket of goods equals the basket of goods of individuals of other ages. If the basket of goods of the second group increases, then Social Security benefits should increase. As the CPI's deviation is low, it does not make other indexes to be accounted for the comparison.

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