You earn $30,000 a year. At the beginning of the year you could buy all of your

Question

You earn $30,000 a year. At the beginning of the year you could buy all of your necessities for $500 per week. At the end of the year, however, it cost you $600 to afford the same basket of necessities. A. Given the price level at the beginning of the year, how many weeks could you survive on your annual salary? Note: you are calculating the “real value” of your salary. B. Assume your salary does not change. Given the price level at the end of the year, how many weeks could you survive on your annual salary? C. Suppose your boss gives you a 3% raise at the start of the next year. Are you better or worse off now than you were one year ago? Answering the following questions will help you reach that conclusion. D. What is the value of your new salary in nominal terms? What is the value of your salary in terms of baskets? E. By how much would your salary need to increase in order to maintain the same standard of living from the first year to the second? Please clearly label answers, thanks!

Explanation / Answer

Annual salary package = $30000

A.

Weeks to be survived @ $500 per week = 30000/500 = 60 weeks

B.

Weeks to be survived @ $600 per week = 30000/600 = 50 weeks

C.

Worse off now in comparison to the scenario of one year ago. Because, increment is salary is 3% and inflation is 20% (((600 – 500)/500) = 20%). Thus, purchasing power has come down.

D.

Value of salary in nominal terms = 30000*(1+3%) = $30900

Value of salary in terms of basket = 30900/600 = 51.5 weeks

E.

Salary should also increase by 20 % to match up the inflation of 20% to achieve the same standard.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.