Question

Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001 and 265.5 in 2006. Henri's 2006 salary in 2001 dollars is

Answer 1

Henri's 2006 salary in 2001 dollars =$46,666.66

Step-by-step explanation:

A rise in the price index implies inflation

Inflation is the increase in the general price level. Inflation erodes the value of money.

This price index is the weighted average price of a basket of goods and services consumed by a typical consumer. It is used to measure the rate of inflation.

So we can determine the salary in the base year value as follows:

2006 Salary in the base year terms=

CPI base year/CPI in the current year × salary in the current year

CPI base year- 177, CPI in the current yea- 256.5,

Salary in the current year - 70,000

Henri 2006 Salary in 2001 Dollar

=177/265.5 ×70,000/265.5 = 46,666.66

Henri's 2006 salary in 2001 dollars =$46,666.66