Question

Suppose you’ll have an annual nominal income of $40,000 for each of the next three years, and the inflation rate is 5 percent per year.

a. Find the real value of your $40,000 salary for each of the next three years.
b. If you have a COLA in your contract, and the inflation rate is 5 percent, what is the real value of your salary for each year?

Answer 1

Year 1=40000
Year 2=40000*.95=38000
Year 3 = 40000*.95*.95=36100

Year 1=40000
Year 2 =40000*1.05*.95=39,900
Year 3=40000*1.05*1.05*.95*.95=39,800