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 2011.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

Real income accounts for inflation. Given that prices have risen since 1961, the purchasing power of $7,000 in 1961 was likely much higher than $7,000 in 2011. Therefore, $35,000 in 2011 is less than 5 times the real income of $7,000 in 1961.

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