The number of dollars a person receives in a year is referred to as his or her monetary (or money) income. This figure can be adjusted to reflect the purchasing power of the dollars received relative to the purchasing power of dollars in some base period. The result is called a person's real income. The CPI can be used to adjust monetary income to obtain real income (in terms of 1984 dollars). To compute your real income for a specific year, simply divide your monetary income for that year by that year's CPI and multiply by 100. In Exercise 14.27 (p. 14-24), we listed the CPI for 1990 and 2015 as 125.8 and 237.0, respectively.
a. Suppose your monetary income increased from $50,000 in 1990 to $95,000 in 2015. What were your real incomes in 1990 and 2015? Were you able to buy more goods and services in 1990 or 2015? Explain.
b. What monetary income would have been required in 2015 to provide equivalent purchasing power to a 1990 monetary income of $20,000?