Suppose that your income during Year X was $50,000, and the CPI for Year X was 150 (base year = Z. Back in Year Z your income was $30,000. Has your real income increased or decreased from Z to year X? By how much?
A) Increased by $5,000.
B) Increased by $3,333.
C) Unchanged.
D) Decreased by $3,333.
E) Decreased by $5,000.

Question

Quizplus · Accepted Answer

To calculate real income, we need to adjust the nominal income for inflation using the CPI. 
Real income in Year Z = $30,000 
Real income in Year X = (Nominal income in Year X) * (Price level in Year Z/ Price level in Year X) 
= ($50,000) * (150/150) = $50,000 
The real income has increased by $20,000 ($50,000 - $30,000). To find the increase in real income from Year Z to Year X, we subtract the real income in Year Z from the real income in Year X: 
Increase in real income = $50,000 - $30,000 = $20,000 
To convert this increase to an average annual increase: 
Average annual increase = Increase in real income / Number of years 
= $20,000 / (Year X - Year Z) 
= $20,000 / (1 year) 
= $20,000 
Thus, the real income has increased by $20,000, which is equivalent to an average annual increase of $3,333 (rounded to the nearest dollar). 
Therefore, the answer is B, Increased by $3,333.

Suppose That Your Income During Year X Was $50,000, and the CPI