Question

3a. Suppose that the consumer price index was 100 on January 1st, 2000 and 110 on January 1st, 2001. Determine the inflation rate between the two dates.

3b. Ruben earned a salary of $50,000 in 2015 and $60,000 in 2018. The consumer price index was 150 in 2015 and 200 in 2018. What has happened to Ruben’s nominal and real income from 2015 to 2018?

Answer 1

Answer 3a.

Inflation Rate = (CPI_{Year 2001} - CPI_{Year 2000}) /  CPI_{Year 2000} * 100

= (110 - 100) / 100 * 100)

= 10%

Answer 3b.

Inflation Rate = (CPI_{Year 2018} - CPI_{Year 2015}) /  CPI_{Year 2015} * 100

= (200 - 150) / 150 * 100

= 33.33 %

Real Income in 2018 = Nominal Income in 2018 / (1 + Inflation Rate)

= 60000 / 1.33

= $45113

Although, the Nominal Income has increased from $50,000 to $60,000. However, the Real Income has decreased and is now $45,113.