Smith's income was $50,000 in year 1 and $55,600 in year 2.The CPI was 114 in year 1 and 124 in year 2.What was the approximate percentage change in Smith's real income between the two years?
A) -2.2 percent
B) +3.4 percent
C) -1.7 percent
D) +5.6 percent
E) +2.2 percent

Question

Quizplus · Accepted Answer

To calculate the real income change, adjust the incomes by the CPI to get them in constant dollars. For year 1, the real income is already in constant dollars since it's the base year. For year 2, adjust the income using the CPI: $55,600 * (114 / 124) = $51,100. The change in real income is from $50,000 to $51,100, which is an increase of $1,100. The percentage change in real income is ($1,100 / $50,000) * 100% = 2.2%.

Smith's Income Was $50,000 in Year 1 and $55,600 in Year