Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006.The consumer price index was 177 in 2001 and 221.25 in 2006.Ruben's 2006 salary in 2001 dollars is
A)$20,000;thus,Ruben's purchasing power increased between 2001 and 2006.
B)$20,000;thus,Ruben's purchasing power decreased between 2001 and 2006.
C)$64,000;thus,Ruben's purchasing power increased between 2001 and 2006.
D)$64,000;thus,Ruben's purchasing power decreased between 2001 and 2006.

Question

Quizplus · Accepted Answer

To calculate Ruben's 2006 salary in 2001 dollars, we need to adjust for inflation using the consumer price index.

2006 salary in 2006 dollars = $80,000
Inflation rate = (CPI in 2006 - CPI in 2001) / CPI in 2001
Inflation rate = (221.25 - 177) / 177 = 0.2525 or 25.25%

2006 salary in 2001 dollars = 2006 salary in 2006 dollars / (1 + inflation rate)
2006 salary in 2001 dollars = $80,000 / (1 + 0.2525) = $64,000

Therefore, Ruben's 2006 salary in 2001 dollars is $64,000. This means his purchasing power increased between 2001 and 2006 since he earned more in 2006 in comparison to the inflation-adjusted currency value of 2001.

Thus the correct answer is (C).

Ruben Earned a Salary of $60,000 in 2001 and $80,000