Suppose you’ll have an annual nominal income of $40,000 for each of the next three years and the inflation rate is 5% per year. Find the real value of your $40,000 salary for each of the three years (Show Calculations) (1 pts per year = 3 pts) Suppose you have a COLA (Cost of Living Adjustment) of 5% per year in your contract, which raises your $40,000 salary 5% for each of the next three years. Given the 5% inflation rate for each of those 3 years, what is the real value of your salary for each year? (Show Calculations; 1 pt p

The real value of the

Year (I) Salary = $39,900.00;

Year (II) = The real value of the salary = $37,800.00

Year (III) = The real value of the salary = $35,700.00

Explanation:

SOLUTION

Year I: $40,000 Plus 5% COLA (Cost of Living Adjustment)

= 40,000.00 x 0.05 = $2,000. 00

= $40,000.00 + $2,000. 00 = $42,000.00

Less 5% Inflation Rate

$42,000.00 X 0.05 = $2,100.00

∴ The real value of the year's salary

= $42,000. 00 - $2,100.00

The real value of the year's salary = $39,900.00

The Year (II) Salary

Year II : $40,000 Plus 5% COLA (Cost of Living Adjustment)

= 40,000.00 x 0.05 = $2,000. 00

= $40,000.00 + $2,000. 00 = $42,000.00

Less 10% Inflation Rate

$42,000.00 X 0.10 = $4,200.00

∴ The real value of the year's salary

= $42,000. 00 - $4,200.00 = $37,800.00

The real value of the year's salary = $37,800.00

The Year (III) Salary

Year III : $40,000 Plus 5% COLA (Cost of Living Adjustment)

= 40,000.00 x 0.05 = $2,000. 00

= $40,000.00 + $2,000. 00 = $42,000.00

Less 15% Inflation Rate

$42,000.00 X 0.15 = $6,300.00

∴ The real value of the year's salary

= $42,000. 00 - $6,300.00 = $35,700.00

The real value of the year's salary = $35,700.00

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