At the time of Elise’s 20 year high school reunion she was earning $50,000 and the CPI was 80. Now that it is time for her to attend her 25 year high school reunion, Elise’s income has risen to $80,000 and the CPI is 150. At her 25 year reunion, can Elise rightfully brag that her real income has risen since the last time she saw her former classmates five years ago?

Her real income has decrease by  $7,333.33

Explanation:

Real income is the amount of goods and services that a give amount of quantity money can purchase. It is also known as the purchasing power of money.  

To determine if there has been a change in her real income, we will compare her real income 20 years ago to her real income 5 years later. This will be done as follows;

Step 1

Determine her real income 5 years after her last reunion

Real income in current year = (CPI in base year/CPI in current year ) × Nominal income

                     = (80/150)× 80,000

                    =   $42,666.67

Step 2

Determine change in real income

Her real income has decrease by  $7,333.33. This is difference between her real income 5 years ago and now. That is $50,000 -  $42,666.67.

Tis implies she cannot purchase as much as she could 5 years ago because of inflation.

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