If a person makes $30,000 in 2004 and the inflation rate is4% annually, how much is this salary worth in the year 2008 (in terms of 2004 dollars)?
30,000 * 0.04 = 1,200
30,000 - 1,200 = $28,800
That's how much it's worth in 2005. Repeat those steps for the next three years.
$28,800 * 0.04 =
Is it $24,773?
I came up with 25,480.47.
Check your figures -- and I'll check mine again and will repost If I'm wrong.
You are correct! I multiplied 28,000 instead of 28,800.
Actually, I found a minor discrepancy. I think the final answer should be #25,480.40
Nadia 23, miguel, etc etc. I interpret the problem a little differently than Ms. Sue.
Here is how I see it.
30,000*0.04 = 1200 and 30,000-1200 - 28,800 at the end of the first year.
For year 2, the salary STILL is 30,000 (not 28,800); therefore, the 30,000*0.04 is another 1200 lost in purchasing power. Thus, 28,800 - 1200 = 27,600.
For year 3, it is 27,600 - another 1200 = 26,400 and at the end of year 4 it is 26400 - 1200 = 25,200.
As I read the problem, the salary stays the same at 30,000/year. The way Ms. Sue has solved it is that the salary is 30,000 only for the first year and it decreases for years 2-4.
To find out how much a salary in 2004 is worth in 2008, accounting for inflation, we need to adjust the salary for the change in purchasing power caused by inflation over the four-year period.
Here's how you can calculate it step by step:
Step 1: Calculate the cumulative inflation rate from 2004 to 2008.
To calculate the cumulative inflation rate, we use the formula:
Cumulative Inflation Rate = (1 + Inflation Rate 1) * (1 + Inflation Rate 2) * ... * (1 + Inflation Rate N) - 1
In this case, we only have one inflation rate of 4% per year for four years, so the cumulative inflation rate is:
Cumulative Inflation Rate = (1 + 0.04) * (1 + 0.04) * (1 + 0.04) * (1 + 0.04) - 1
Step 2: Calculate the adjusted salary in 2008.
Adjusted Salary = Initial Salary * (1 + Cumulative Inflation Rate)
In this case, the Initial Salary is $30,000. Let's plug in the values and calculate the adjusted salary:
Cumulative Inflation Rate = (1 + 0.04) * (1 + 0.04) * (1 + 0.04) * (1 + 0.04) - 1
= 1.04 * 1.04 * 1.04 * 1.04 - 1
= 1.169858944 - 1
= 0.169858944
Adjusted Salary = $30,000 * (1 + 0.169858944)
= $30,000 * 1.169858944
= $35,095.77
Therefore, in terms of 2004 dollars, a salary of $30,000 in 2004 would be equivalent to approximately $35,095.77 in 2008.