Jodie earns 25,000 atthe end of year 1,when the CPI was 460. If the CPI at the e

Question

Jodie earns 25,000 atthe end of year 1,when the CPI was 460. If the CPI at the end ofyear 2 is 504, what would Jodie have to earn at the end of year 2to maintain a constant real wage? What would she ahve to earn in year 2 to obtain a 5% increasein her real wage? What percentage increase in the nominal wage isthis? Jodie earns 25,000 atthe end of year 1,when the CPI was 460. If the CPI at the end ofyear 2 is 504, what would Jodie have to earn at the end of year 2to maintain a constant real wage? What would she ahve to earn in year 2 to obtain a 5% increasein her real wage? What percentage increase in the nominal wage isthis? What would she ahve to earn in year 2 to obtain a 5% increasein her real wage? What percentage increase in the nominal wage isthis?

Explanation / Answer

We multiply the wage Jodi earned in year 1 by the inflationrate and add it to her wage to find how much she has to earn tomaintain a constant real wage. 25000 * .0956 = 2391.30. 25000 +2391.30 = 27391.30 which is how much she has to earn to maintainconstant real wage.
To find how much she would have to earn to obtain a 5%increase in her real wage. We can multiply her wage of 25,000 by.05 and add it to her wage to determine what her wage will be withthe 5% increase. (25000 * .05) + 25000 = 26250 is the wage with the5% increase. We then have to adjust for inflation by multiplying26250 by the inflation rate and adding it back to her wage. (26250* .0956) + 26500 = 29009.50 which is how much she would have toearn in year 2 to obtain a 5% increase in her real wage.
Nominal wage is just the increase in wage which can be solvedby (new wage - old wage)/old wage so we get (29009.50 - 25000) / 25000 = .16038. We multiply the answer by100 to get the percentage of 16.038% which is the percentageincrease in nominal wage.

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