Question

When Kevin started working 28 years ago, his salary was $55,899. His current salary is $154,530....

When Kevin started working 28 years ago, his salary was $55,899. His current salary is

$154,530. When Kevin started working, the price level was 138, while the current price level is

156. What was Kevin’s average per year percentage raise in real terms over the 28 years?

State your answer to two decimal places (e.g., 3;28).

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Answer #1

Real Salary = Nominal Salary / Price level

28 years ago, Kevin's nominal salary was $55,899 and price level was 138.

Hence, Real salary of Kevin 28 year ago = 55899/138 = $405.07

Now, Kevin's nominal salary was $154,530 and price level was 156.

Hence, Real salary of Kevin 28 year ago = 154530/156 = $990.58

So, there is increase of $585.58 ($990.58 - $405.07) in Kevin’s Salary real terms in 28 years.

The average per year percentage raise in real terms = 585.58/(405.07*28)= 0.0516

The average per year percentage raise in real terms = 5.16%

Also, CAGR in real terms = (990.58/405.07)1/28-1 = 0.0325 = 3.25%

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