Question

For each year, calculate real income.

Year Nominal Income CPI Real Income
(dollars)
1 $45,000 100 $
2 $47,250 103 $
3 $48,650 107 $
4 $49,800 110 $

Answer 1

Real income is calculated by adjusting the nominal income by the Consumer Price Index (CPI) of that year, using the formula Real Income = Nominal Income x (100 / CPI). For each year, the calculation results in a different real income value.

Step-by-step explanation:

Calculating Real Income

To calculate the real income for each year, we need to adjust the nominal income by the Consumer Price Index (CPI) for that year. The formula to use is:

Real Income = Nominal Income × (100 / CPI)

• For Year 1: Real Income = $45,000 × (100 / 100) = $45,000
• For Year 2: Real Income = $47,250 × (100 / 103) ≈ $45,873.79
• For Year 3: Real Income = $48,650 × (100 / 107) ≈ $45,467.29
• For Year 4: Real Income = $49,800 × (100 / 110) ≈ $45,272.73

Here, the CPI is being used as a defeater to adjust nominal income to real income terms, accounting for inflation.