Question

Suppose you have a wage contract stipulating you get $50,000 annual nominal income starting this year (year 1 ). Assume inflation is 3%. What is the real value of your wages in two years (year 3 )?

A. $38,462
B. $47,130
C. $50,000
D. $48,544

Answer 1

The real value of the annual nominal income of $50,000 after two years at an inflation rate of 3% is approximately $47,130. Therefore, the correct answer is B. $47,130.

Step-by-step explanation:

To find the real value of a nominal income of $50,000 after two years when taking into account an annual inflation rate of 3%, we adjust the nominal income for inflation. To do this, we use the formula:

Real Value = Nominal Income / (1 + Inflation Rate)^Number of Years

Substituting the given values:

Real Value = $50,000 / (1 + 0.03)^2

Real Value = $50,000 / (1.03)^2

Real Value = $50,000 / 1.0609

Real Value ≈ $47,130

The real value of the wages in two years (year 3) is approximately $47,130. Therefore, the correct answer is B. $47,130.