Question

One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 12%. After five years, this family's nominal income ______, and their real income ______.

Answer 1

Answer:

• One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 12%. After five years, this family's nominal income     increased to $56,318.00     ,and their real income       increased to $31,956.35       .

Explanation:

The nominal income will grow at a rate of 15%, per year during five years. Then, the growing factor is  g = 1 +15% = 1 + 0.15 = 1.15.

That means that $28,000 will muliply five times by 1.15:

• $28,000 × 1.15 × 1.15 × 1.15 × 1.15 × 1.15 = $28,000 × (1.15)⁵

• $28,000 × 2.011 = $56,318.00

The CPI increased by 12% during the same period. Thus, the CPI after 5 years will be multiplied by 1.12⁵≈ 1.762

The real income, referred to 1990 will be $28,000 × (1.15)⁵ / (1.12)⁵ ≈ $28,000 × 1.1413 ≈ $31,956.35

Then, you can complete the text with:

One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 12%. After five years, this family's nominal income     increased to $ 56,318.00     ,and their real income       increased to $31,956.35       .

As long as the rate at which the income increases is higher than the rate at which the CPI increases, the real income increases.