Answer:
Income difference= $8,250
Explanation:
Giving the following information:
Actual salary= $25,000 per year
MBA salary= $35,000 per year.
Inflation rate= 5 percent.
We will separate the analysis. First, we will calculate the nominal increase. Then, the real increase based on purchasing power.
In nominal terms, the increase in income is equal to the difference between salaries.
Income increase= 35,000 - 25,000= $10,000 increase.
In real terms, we need to calculate the effect of inflation on your purchasing power.
Actual income= $25,000
MBA income= 35,000*0.95= $33,250
Income difference= $8,250
In other terms, the real purchasing power of the MBA income decreases. Therefore, the difference today between real salaries is lower than the nominal difference.
