Question

During the same 10-year period, your after-tax income rose from 540,000 to $55.000. The compo CPI at the beginning of the period was 86 and at the end of the 10-year period is 100.7 marks Has the percent change in your real after-tax income from the beginning to the end of the 10 period matched the change in after-tax nominal income? Has the change in your real income kept up with the inflation rate? nswers should be to nearest dollar and .01%

Answer 1

Computation of Inflation Rate over the 10 years:
Inflation Rate
=(New CPI-Old CPI)/Old CPI
=(100-86)/86
16.28%
(a) 1. Change in Real After Tax Income:
Beginning After Tax Income	$40,000
Ending Real After Tax Income
=Nominal Income/(1+Inflation Rate)
=55000/(1+16.28%)	$47,299.62
Change in Real After Tax Income
=(47299.62-40000)/40000	18.25%
(a) 2. Change in Nominal After Tax Income:
Beginning After Tax Income	$40,000
Ending Nominal After Tax Income	$55,000
Change in Nomianl After Tax Income
=55000-40000)/40000	37.50%
Thus, the % change in Real after-tax income DOESN'T MATCH with the % change in after-tax Nominal Income.
(b)
Change in Real Income	18.25%
Inflation Rate	16.28%
Thus, change in Real Income HAS KEPT UP with the inflation rate.