Question

Suppose that you graduate in the year 2024 and at that time the Consumer Price Index (CPI) is 270. Your father graduated in 1983 when the CPI was 100. Suppose your starting salary is $60,000 per year in 2024. Your father’s starting salary in 1983 was $30,000. Using the CPI to calculate real incomes, which of the following statements is true? A. Your real income from your first job is greater than your father’s real income in 1983. B. There has been no inflation since 1983. C. Your real income from your first job is exactly equal to your father’s real income in 1983. D. Your real income from your first job is less than your father’s real income in 1983.

Answer 1

By using CPI(Consumer Price Index) we can calculate real income as:

Real income=Nominal wage rate/CPI * 100

So,Father's real income in 1983=$30000/100*100=$30000

Individuals real income in 2024=$60000/270*100=$22222

Among the above statements,statement (d) is correct as we can see that the individual’s real income in 2024 from the first job is lesser than the father's real income in 1983 while calculated using the Consumer Price Index. And also the other statements  :A. Your real income from your first job is greater than your father’s real income in 1983. B. There has been no inflation since 1983. C. Your real income from your first job is exactly equal to your father’s real income in 1983 are not true.It can be simply understood by looking onto the real incomes calculated.