Gulten started her career with an annual salary of $82,000 in 2006. Five years later, in 2011, her salary had increased to $85,000 a year. If the values of the CPI (with a base of 1982−1984) for 2006 and 2011 are 201.6 and 224.9, respectively, compute the increase in Gulten's real income.
A) −7.08%
B) 3.66%
C) 15.68%
D) 92.92%

Question

Quizplus · Accepted Answer

To calculate the increase in Gulten's real income, we first adjust her salaries to constant dollars using the CPI values provided. The formula for adjusting to constant dollars is: (Nominal Salary / CPI of Year) * CPI of Base Year. Assuming the CPI of the Base Year (1982-1984) is 100 (a common practice for easier calculation), we adjust both salaries to 1982-1984 dollars.For 2006: (82,000 / 201.6) * 100 = $40,675.40 (approximately)For 2011: (85,000 / 224.9) * 100 = $37,787.46 (approximately)The change in real income is then: (($37,787.46 - $40,675.40) / $40,675.40) * 100 = -7.08%.This shows a decrease in real income, not an increase, due to inflation outpacing the nominal salary increase.

Gulten Started Her Career with an Annual Salary of $82,000