   Chapter 6.1, Problem 3ST

Chapter
Section
Textbook Problem

In year 1, your annual income is $45,000 and the CPI is 143.6; in year 2, your annual income is$51,232 and the CPI is 150.7. Has your real income risen, fallen, or remained constant? Explain your answer.

To determine

The changes in the real income.

Explanation

Given that in the year 1 the annual income (I1) is $45,000 and the CPI1 is 143.6. In the year 2 the annual income (I2) is$51,232 and the CPI2 is 150.7.

The real income is calculated using Equation (1) as follows:

Real income=(Nominal incomeCPI)×100 (1)

The real income in year 1 can be calculated by substituting the respective values in Equation (1) as follows:

Real income1=(I1CPI1)×100

Real income=(45,000143.6)×100=31,337

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