When Terry retired from Caterpillar,he received a pension: Caterpillar would pay him $50,000 the first year he was retired,with the amount increasing by 5 percent each year thereafter.If inflation turned out to be 2 percent each year,what would happen to the real value of Terry's pension?
A) It would increase each year by 5 percent.
B) It would increase each year by 3 percent.
C) It would decrease each year by 5 percent.
D) It would decrease each year by 3 percent.

Question

Quizplus · Accepted Answer

The real value of Terry's pension increases each year because the nominal increase in his pension (5%) is greater than the rate of inflation (2%). The real increase is the difference between these rates, which is 3%.

When Terry Retired from Caterpillar,he Received a Pension: Caterpillar Would