Your grandfather tells you that he earned $7,000/year in his first job in 1961.You earn $35,000/year in your first job in 2018.You know that average prices have risen steadily since 1961.You earn
A)5 times as much as your grandfather in terms of real income.
B)more than 5 times as much as your grandfather in terms of real income.
C)less than 5 times as much as your grandfather in terms of real income.
D)less than 5 times as much as your grandfather in terms of nominal income.

Question

Quizplus · Accepted Answer

To accurately compare incomes over time, one must adjust for inflation to calculate real income. Although nominally you earn 5 times more than your grandfather ($35,000 vs. $7,000), when adjusting for the increase in average prices (inflation) over the years, the real income increase is less than 5 times. This is because the purchasing power of $7,000 in 1961 was significantly higher than the purchasing power of $35,000 in 2018.

Your Grandfather Tells You That He Earned $7,000/year in His