The take home pay of an employee working in an urban area for 1993 and 2007 are: If the CPI rose from 159 in 1993 to 210 in 2007 (1982-84 = 100), what was the "real" take home pay of the employee in 2007?
A) $5,000
B) $15,000
C) $113,200
D) $53,904

Question

The take home pay of an employee working in an urban area for 1993 and 2007 are:  If the CPI rose from 159 in 1993 to 210 in 2007 (1982-84 = 100), what was the "real" take home pay of the employee in 2007?
A) $5,000 
B) $15,000 
C) $113,200 
D) $53,904

Quizplus · Accepted Answer

To find the "real" take home pay of the employee in 2007, we need to adjust the nominal take home pay for inflation using the CPI.

First, we need to calculate the inflation rate between 1993 and 2007:

Inflation rate = (CPI in 2007 - CPI in 1993) / CPI in 1993
Inflation rate = (210 - 159) / 159
Inflation rate = 0.3214 or 32.14%

This means that prices increased by 32.14% between 1993 and 2007. To adjust the nominal take home pay of the employee in 2007 for inflation, we need to divide it by 1 + the inflation rate:

Real take home pay in 2007 = Nominal take home pay in 2007 / (1 + inflation rate)
Real take home pay in 2007 = $80,000 / (1 + 0.3214)
Real take home pay in 2007 = $60,590.40

Therefore, the best choice is D, $53,904.

The Take Home Pay of an Employee Working in an Urban