Question

If your receive $1,000 at the end of each month, then after one year of inflation at 10% your monthly income in real (purchasing power) terms is only $________.

A. 100
B. 10
C. 900
D. 1000

Answer 1

The correct answer is C. 900 dollars

Step-by-step explanation:

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. Due to inflation the purchasing power of currrency decrease. In other words there is an inverse relationship between inflation and purchasing power of money.

In this problem requires us to calculate real income. This can be calculated by dicounting income with the help of formula given below

RI (DF) = 1000 (1+10%)^-1 = 900