Question

In the year 2002 your dad made $60,000 per year and in the year 2018 your dad made $80,000 per year. The CPI in 2002 was 179.9 and the CPI in 2018 was 251.107.

Your dad’s real income in the year 2002 measured in base year dollars was $  .

Your dad’s real income in the year 2002 measured in 2018 dollars was $  .

His nominal income increased by  %.

The inflation rate was  %.

His real income increased by

Answer 1

CPI base year = 100

1) Your dad’s real income in the year 2002 measured in base year dollars was :

[(Income in 2002)/CPI₂₀₀₂] x CPI (base year) = (60000/179.9) x 100 = $33,351.86

2) Your dad’s real income in the year 2002 measured in 2018 dollars was :

[(Income in 2002)/CPI₂₀₀₂] x CPI₂₀₁₈ = (60000/179.9) x 251.107 = $83,748

3) His nominal income increased by :

(80000 - 60000)/60000 x 100 = 33.33%

4) The inflation rate was :

(251.107 - 179.9)/179.9 x 100 = 39.58%

5)

Real Income in 2018 = (80000/251.107) x100 = $31,858.92

His real income increased by :

(31,858.92 - 33,351.86)/33,351.86 x 100 = -4.47%