Question

suppose you'll have an annual nominal income of $25000 for each of the next 3 years, and the inflation rate is 5 percent per year.

(a) find the real value of your $25000 salary for each of the 3 years
year 1-
year 2-
year 3-

(b) if you have a COLA in your contract, and the inflation rate is 5 percent per year, what is the real value of your salary of $25000 for each year?
year 1-
year 2-
year 3-

Answer 1

SOLUTION:

(a) Real value of your $25000 salary for each of the 3 years
year 1- 61,904.76
year 2- 58,956.92
year 3- 56,149.44

Formula used:

year 1-25,000 * (1+0.05)^1 = 61,904.76
year 2-25,000 * (1+0.05)^2 = 58,956.92
year 3-25,000 * (1+0.05)^3 = 56,149.44

　

(b) if you have a COLA in your contract, and the inflation rate is 5 percent per year, the real value of your salary of $25000 for each year is:
year 1- $25000
year 2- $25000
year 3- $25000

Working: if you have a COLA in your contract, the real value will remain same each year