Question

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 2016. 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. 3 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.

Answer 1

C) less than 5 times as much as your grandfather in terms of real income

Step-by-step explanation:

Because the prices have risen since 1961 the purchasing power of a single dollar in 1961 greater than one dollar t present day.

So in real income terms, the difference is not 5 times, the difference is lower.

Also, if the inflation rate was high enough, your grandfather could be winning more in 1961 than you today.