Question

In year 1 the CPI is 174, and in year 2 the CPI is 190. If Sarah's salary was $49,800 in year 1, what salary in year 2 would cause her to exactly "keep up with inflation"

Answer 1

Salary in year 2 = $54,379.31

Step-by-step explanation:

The Consumer price index is the weighted average of the cost of basket of good of goods and services consumed by a typical consumer in an economy. It is used to measure the rate of inflation rate.

A rise in the price index implies inflation

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

So we can determine the salary in the year 2 as follows:

2006 Salary in the base year terms=

CPI in the current year 2/CPI base year 1 × salary in the current year

190/174× 49,800 = 54,379.31

Salary in year 2 = $54,379.31