Question

You are pleased to see that you have been given a 4.56% raise this year. However, you read on the Wall Street Joumal Web site that inflation over the past year has been 2,35%. How much better off are you in terms of real purchasing power? (Note: Be careful not to round any intermediate steps less than six decimal places.) Your real purchasing power is \%. (Round to two decimal places.)

Answer 1

To determine your change in real purchasing power, you need to calculate the inflation-adjusted increase in your salary.

Step-by-step explanation:

In order to determine how much better off you are in terms of real purchasing power, we need to calculate the inflation-adjusted increase in your salary. First, calculate the inflation-adjusted raise by subtracting the inflation rate from 1 and then multiplying it by your raise percentage:

Inflation-adjusted raise = (1 + raise percentage) - inflation rate.

In this case, the inflation-adjusted raise would be (1 + 0.0456) - 0.0235 = 1.0221. Next, multiply the inflation-adjusted raise by your original salary to find your new purchasing power:

New purchasing power = inflation-adjusted raise * original salary.

For example, if your original salary was $50,000, your new purchasing power would be 1.0221 * $50,000 = $51,105. Therefore, your real purchasing power has increased by $1,105.