In Questions make the assumption that the change in housing prices exactly matches the change in the CPI. In fact, housing is only part of the CPI, and figures into the CPI through rents rather than sale prices, so this assumption may be far from correct.
-In 1997, Howard had the opportunity to either invest $100,000 for five years in the housing market or in a CD paying 2.5%. If the 1997 CPI is 160.5 and the 2002 CPI is 179.9, which is the better investment?
A) the housing market
B) the CD
C) The options are equivalent.
D) There is not enough information to know.

Question

Quizplus · Accepted Answer

To compare the two investments, we need to calculate the inflation rate over the five-year period using the CPI. The inflation rate is (179.9 - 160.5)/160.5 = 0.121 or 12.1%.

If Howard invested in the housing market, we assume that the price of the housing he invested in increased by 12.1% over the five-year period. If he invested in a CD, he would have earned a fixed interest rate of 2.5% per year for five years, compounding annually.

Using the formula for compound interest, the future value of the CD investment after five years would be: 
$100,000(1+0.025)^5 = $113,144

Since the future value of the CD investment is greater than the assumed increased value of the housing investment, the better investment choice is the CD (option B).

In Questions Make the Assumption That the Change in Housing