True or false and why (5) In 1913, the President of the United States earned a salary of $75,000 and the price level, measuredby the CPI, was 10. In 2018, the salary of the President was $400,000, while the CPI stood at 255.7Thus, the purchasing power of the current President's salary is higher than that of the President in 1913since he is earning more dollars.

Answered: (5) In 1913, the President of the…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: Measuring The Cost Of Living

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True or false and why

(5) In 1913, the President of the United States earned a salary of $75,000 and the price level, measured
by the CPI, was 10. In 2018, the salary of the President was $400,000, while the CPI stood at 255.7
Thus, the purchasing power of the current President's salary is higher than that of the President in 1913
since he is earning more dollars.

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ANS

Purchasing power is the actual amount of goods & services that can be purchased using the dollars. The purchasing power of the president’s salary can be obtained by dividing the dollar value of the president’s salary by the price level (CPI).

In 1913 since the salary was $75,000 and CPI was 10 therefore the purchasing power is 75,000/10 = 7,500.

In 2018 since the salary was $400,000 and CPI was 255.7, therefore, the purchasing power is 400,000/255.7 = 1,564.33

Therefore, though the salary has increased from $75,000 TO $400,000 but the purchasing power of the president’s salary has actually declined from 7,500 to 1,564.33 because of the rise in the level of CPI.

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