American Institute of Certified Planners (AICP) Practice Exam

In which economic analysis does inflation notably not affect the constant dollars used?

1. Cost Benefit Analysis

2. Input-Output Analysis

3. Fiscal Impact Analysis

4. Earnings Analysis

The correct answer is: Cost Benefit Analysis

The correct answer highlights the distinctive aspect of Cost Benefit Analysis (CBA) concerning the use of constant dollars. In CBA, analysts often employ constant dollars to adjust future costs and benefits to present value terms, ensuring that the analysis remains unaffected by inflation fluctuations. This approach allows for an apples-to-apples comparison of financial metrics over time by removing the variability brought about by inflation and providing a clearer image of the true economic value of projects or investments. Constant dollars are calculated using a price index to remove the effects of changes in price levels, which means that the value of money remains stable over time in this type of analysis. Therefore, in CBA, the effects of inflation are accounted for differently, making it clear that inflation does not impact the calculations of constant dollars involved. The other types of analysis mentioned, such as Input-Output Analysis, Fiscal Impact Analysis, and Earnings Analysis, typically incorporate current dollars, which are subject to inflation. This means they reflect the current price levels and can vary significantly over time due to inflation-related changes, affecting the accuracy of comparisons or projections made within those frameworks.