Question

If the CPI was 207 in 2007 and 225 in 2011, what pay raise would someone who earned $50,000 in income in 2007 have to receive in order to keep her purchasing power constant in 2011

Answer 1

=$4,348

Step-by-step explanation:

To calculate expected increase in income between 2007 and 2011, the following steps will be undertaken

Step 1: Calculate the inflation difference between the 2007 and 2011 Consumer Price Index (CPI)

The formula for inflation rate = (CPI 2011 - CPI 2007)/CPI 2007 x 100

CPI for 2011 = 225

CPI for 2007 = 207

Inflation rate = (225-207)/207 x 100

= 18/207 x 100 = 8.696%

Step 2: Multiply the inflation rate and the earnings in 2007 to get the raise required to keep her purchasing power constant

= 0.8696 x $50,000

=$4,348.