Question

Year CPI 1 100 2 103 3 106.5 John earned $50,000 in year 1. In year 2, he would need to earn at least _______ in order to maintain constant purchasing power. a) $46,948 b) $52,900 c) $53,250 d) $51,500

Answer 1

To determine what the purchasing power needs to be in year 2 for a constant purchasing power, we compute the amount by moving from the 50,000 that corresponds to the CPI of 100, that of the initial or base year. Therefore we have: (50,000 x 103) / 100 = 51,500. The correct answer is then d.