MACROECONOMICS -Question -- Inflation, GDP, Economic Growth & Unmployment QUESTI

Question

MACROECONOMICS -Question -- Inflation, GDP, Economic Growth & Unmployment

QUESTION 3

Suppose that James’s income in Year 1 was $39,000. Over the next four years his income increases by 6% per year. At the same time, the economy experiences an inflation rate of 4% per year.

a. Complete the table below. Do not round your intermediate calculations. Enter your final responses as a whole number for Nominal income and Real income. Enter your final responses for the price index rounded to one decimal place.

b. At the end of Year 5, James’s real income will be $___________ .

PLEASE SHOW YOUR WORK

Year Nominal income Price index Real income 1 $39,000 100 $ 2 3 4 5

Explanation / Answer

Real Income = (Nominal Income/ Price Index) * 100

We take 104 as Price index after year 1 because of the 4% inflation. Also, a 6% increase (Income of previous year *106/100) is caculated as nominal income every year.

The real income at the end of the 5th year is $47,343

Year Nominal Income Price Index Real Income 1 39,000 100 39,000 2 41340 104 39,750 3 43820 104 42135 4 46,450 104 44663 5 49,237 104 47,343

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