Question

Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. Refer to Scenario 24-1. In real terms, the income of Mia's son amounts to about what percentage of Mia's income?

a) 12.9 percent
b) 1164.8 percent
c) 8.6 percent
d) 1.1 percent

Answer 1

To determine the percentage of Mia's son's income in real terms compared to Mia's income in 1943, we adjust the incomes for inflation using the price index. 232.6% of Mia's income in real terms.

Step-by-step explanation:

To determine the percentage of Mia's son's income in real terms compared to Mia's income in 1943, we need to adjust the incomes for inflation using the price index.

First, we calculate the real value of Mia's income in today's dollars:

Real income = (nominal income / price index) * 100

Real income = ($21,000 / 18.3) * 20.2

Real income = $116,129.51

Next, we calculate the percentage of Mia's son's income compared to Mia's income:

Percentage = (Mia's son's income / Mia's income) * 100

Percentage = ($270,000 / $116,129.51) * 100

Percentage = 232.6%

Therefore, the income of Mia's son amounts to about 232.6% of Mia's income in real terms.