Question

Suppose that the CPI in 1999 was 170 and your salary was $44,000. And the CPI in 2020 is expected to be 300.

a) What is the RI (Real Income) in year 1999?

b) What is the RI in 2020? (Use “X” as the NI). NI (Nominal Income).

c) What salary would you have to earn in 2020 in order to equal year 1999?

salary for 2020 was not given

Answer 1

Question

(a)

Nominal Income in 1999 = $44,000

CPI in 1999 = 170

Calculate the Real Income (RI) in year 1999 -

Real Income = Nominal Income * (100/CPI in 1999]

Real Income = $44,000 * [100/170]

Real Income = $25,882.35

Thus,

The RI (Real Income) in year 1999 is $25,882.35

(b)

Let Nominal Income (NI) in 2020 be X

CPI in 2020 = 300

Calculate the Real Income (RI) in year 2020 -

Real Income = Nominal Income * (100/CPI in 2020)

Real Income = X * (100/300)

Real Income = X/3 or 0.33X

Thus,

The RI (Real Income) in 2020 is 0.33X

(c)

Calculate the income in 2020 that would be equal to income in 1999 -

Income in 2020 = Nominal income in 1999 * [CPI in 2020/CPI in 1999]

Income in 2020 = $44,000 * [300/170]

Income in 2020 = $77,647.06

Thus,

The salary to earn in 2020 in order to equal year 1999 is $77,647.06