A urning that the inflation rate from 2014through 2016 is 6

A urning that the inflation rate from 2014through 2016 is 6% per year, what would be the real value of $25,000 income in cach of the three years? (Show all work) What does the real income for 2014 mean? (6 pts)

Solution

• Income is $25000. From 2014 through 2016, the inflation rate is 6? per year but there is no change in income. Therefore, the value of the $25000 income will decrease by 6? a year because goods and services become more expensive. Real value of the income decreases each year because purchasing power of the income decreases.

In 2014, real value of $25000 = $25000 - ( $25000 * 6?) = $23500

In 2015, real value of $25000 = $23500 - ( $ 23500 * 6?) = $ 22090

In 2016, $25000 will have real value of only $20764.6 [$ 22090 - ($22090 *6?)] .

Real income for 2014 means the income of $25000 will be able to buy only $23500 of goods and services. This is because as inflation rate is 6?, cost of goods and services have increased by 6? and the purchasing power of $25000 of income has decreased.