Question

D Question 7 2.5 pts Consider this information: In 1980, Sam made $32,000 per year. In 2019, his cousin Nick makes $65,000. Assume the CPI is currently 256 and was 82.4 in 1980. Sam says that, if we adjust for inflation, he actually made more than Nick does now when he started work in 1980. You want to find out if he's right. Which person makes more in inflation-adjusted (real) terms? Would your answer change if Nick made $82,000 a year instead? Nick makes more in real terms when Nick earns $65,000, but if Nick earns $82,000. Sam earn more terms. Sam makes less in real terms than Nick whether Nick makes $65,000 or $82,000 in 2019. Sam makes more in real terms than Nick whether Nick makes $65,000 or $82,000 in 2019. Sam makes more in real terms when Nick earns $65,000, but if Nick earns $82.000. Nick earns more in real terms.

please show work and explain your answer so I also can understand. thank you

Answer 1

Question 7) In this we need to find the present value of Sam’s earnings in 1980 with the help of the values of CPI given. So the value of Sam’s earnings in 2019 = 32000*256/82.4 = $99417.5

So in 2019, the value of Sam’s earnings in 1980 is $99417.5, which is greater than the current earnings of Nick, which is $65000. Even if Nick earns $82000, Sam’s earnings in real terms will be higher.

So the correct answer is Sam makes more in real terms than Nick whether Nick makes $65000 or $82000 in 2019. So option 3 is the correct answer.

Question 8) We need to know that GDP deflator only measures the price of goods and services produced domestically, whereas, CPI measures the price of the goods and services that the consumers bought. So if the price of bananas went up dramatically, this would not be reflected in inflation calculated with the GDP Deflator and would be reflected in inflation calculated with the CPI. So option 4 is the correct answer.