Question

Suppose the median household earned $9,242 in 1976 and $52,624 in 2016. During that time, also suppose the CPI rose from 45.6 to 219.75. Instructions: Enter your answer as a percentage rounded to one decimal place.
a. The total growth rate in nominal median household income from 1976 to 2016 was
b. The total growth rate in real median household income from 1976 to 2016 was

Answer 1

Answer:

a) 469.40%

b) 18.15%

Explanation:

a)

Total nominal growth rate = $(\frac{\textup{Earned income in 2016}}{\textup{Earned income in 1976}}-1)\times100\%$

thus,

Total nominal growth rate = $(\frac{\textup{52,624}}{\textup{9,242}}-1)\times100\%$

= 469.40%

b) Total real growth rate = $(\frac{\textup{Real earned income in 2016}}{\textup{Real earned income in 1976}}-1)\times100\%$

now,

Real earned income in 1976 = $\frac{\textup{Earned income in 1976}}{\textup{CPI in 1976}}$

=  $\frac{\textup{9,242}}{\textup{45.6}\%}$

= $20,267.54

and,

Real earned income in 2016 = $\frac{\textup{Earned income in 2016}}{\textup{CPI in 2016}}$

=  $\frac{\textup{52,624}}{\textup{219.75}\%}$

= $23,947.21

Therefore,

Total real growth rate = $(\frac{\textup{23,947.21 }}{\textup{20,267.54 }}-1)\times100\%$

= 18.15%