Question

2. If the Consumer Price Index rose from 120 to 138 during a 12 month period. what was the rate of inflation during this time?

3. This year Anjun's monthly pay rose from $1000 (last year's rate) to $1100 (this year's rate). During the year the inflation rate for consumer products was 12%.

A. What happened to Anjun's nominal income? (up or down, and by what percent?)

B. What happened to Anjun's real income? (up or down and by what percent?)

Answer 1

2.
Price index for year 1 = 120

Price index for year 2 = 138

Difference 138 - 120 = 18

Inflation = 18/120*100 = 15%


3A.
Nominal income = ?

Previous income = $ 1000
Current Income = $ 1100

Change in nominal income = $ 1100 - $ 1000 = $100

Nominal income goes up
Nominal income goes up by = $ 100 / $1000 * 100 = 10%


3B.
Arjun's real income for previous year = $ 1000 * 100 / 120 = $ 833.33 (assuming 100 index for base year)
Arjun's real income for current year = $ 1100 * 100 / 138 = $ 797.10 (assuming 100 index for base year)
Fall in Arjun's real income = $ 797.10 - $ 833.33 = $ (-)36.23

Real income falls
Real income falls by = 36.23 / 833.33 * 100 = 4.35%