In economics, what does the term 'cost of living' refer to?

• A. The amount of taxes paid by individuals to the government
• B. The amount of money needed to purchase basic goods and services required to maintain a certain standard of living
• C. The price paid by firms to produce goods and services
• D. The total income earned by households in a given period

Answer: (B)

Verified step by step guidance

1. Understand that the term 'cost of living' in economics refers to the amount of money required to maintain a certain standard of living.
2. Recognize that this involves the money needed to purchase basic goods and services such as food, housing, clothing, healthcare, and transportation.
3. Note that 'cost of living' is not related to taxes paid by individuals, prices paid by firms, or total household income, but specifically to the expenses necessary for everyday life.
4. Consider that changes in the cost of living are often measured by indices like the Consumer Price Index (CPI), which track the price changes of a basket of essential goods and services over time.
5. Summarize that the 'cost of living' essentially captures how much money a person or household needs to cover basic expenses to maintain their usual lifestyle.