Question

Maddie's nominal income was $33,000 in 2012. In 2013, because of her excellent work ethic, she received a raise that increased her nominal income to $35,000. Maddie knew a lot about inflation so she decided to see how much of a raise she really received. After researching the consumer price index at the Bureau of Labor Statistics web site, she found that the CPI for 2012 was 110 and that it jumped to 125 in 2013. Calculate the percent change in Maddie's real income after she was given a raise. Was she hurt or helped by this unanticipated inflation? Explain.

Answer 1

Answer:

-6.7 %; Hurt  

Explanation:

1. Calculate Maddie's inflation adjusted income

$\text{Inflation adjusted income} = \text{2012 income} \times \dfrac{\text{2013 CPI}}{\text{2012 CPI}}\\\\= 33 000 \times \dfrac{125}{110} = \ 37 500$

Maddie should be earning $37 500 in 2013 just to keep up with inflation.

2. Calculate the percent change in Maddie's real income.

Maddie is "real" salary is only $35 000.

$\text{\% Change} = \dfrac{\text{real - expected}}{\text{expected}} \times 100 \, \%\\\\= \dfrac{35 000 - 37 500 }{37 500} \times \, 100 \% = \dfrac{-2500}{37 500} \times 100 \, \% = \mathbf{-6.7 \, \%}$

The percent change in Maddie's real income is -6.7 %.

Maddie was certainly hurt by this inflation.