I am having trouble with this question, please help.
If a person makes $30,000 in 2004 and the inflation rate is 4% annually, how much is this salary worth in the year 2008 (in terms of 2004 dollars)?
To find out how much a salary from one year is worth in terms of a different year, we need to adjust the salary for inflation.
Step 1: Calculate the cumulative inflation rate from 2004 to 2008.
To do this, we can use the formula:
Cumulative Inflation Rate = (1 + Annual Inflation Rate) ^ Number of Years
In this case, the annual inflation rate is 4% (which can be written as 0.04), and the number of years is 4.
Cumulative Inflation Rate = (1 + 0.04) ^ 4
Calculating this, we get:
Cumulative Inflation Rate = (1.04)^4 = 1.16985856
Step 2: Adjust the salary for inflation.
To find the value of the $30,000 salary in 2008 dollars, we can multiply it by the cumulative inflation rate.
Adjusted Salary = Initial Salary * Cumulative Inflation Rate
Adjusted Salary = $30,000 * 1.16985856
Calculating this, we get:
Adjusted Salary = $35,095.76 (rounded to the nearest cent)
So, in terms of 2004 dollars, a salary of $30,000 in 2004 would be worth approximately $35,095.76 in 2008.