If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 1995 and 2005, real household income:
A) increased.
B) decreased.
C) was constant.
D) may have either increased or decreased.

Question

Quizplus · Accepted Answer

To find real income, adjust nominal income for inflation using the CPI. In 1995, real income is $35,000 / 1.00 = $35,000. In 2005, real income is $40,000 / 1.65 ≈ $24,242.42. Since $24,242.42 is less than $35,000, real income decreased.

If the CPI Equaled 1