Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 20: Problem 4

(Related to Solved Problem 20.5 on page 683 ) In 1924 , the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled "How to Live on \(\$ 36,000\) a Year," in which he wondered how he and his wife had managed to spend all of that very high income without saving any of it. The CPI in 1924 was \(17,\) and the CPI in 2016 was 240 . What income would you have needed in 2016 to have had the same purchasing power that Fitzgerald's \(\$ 36,000\) had in \(1924 ?\) Be sure to show your calculation.

Short Answer

Expert verified
In order to have the same purchasing power in 2016 that $36,000 had in 1924, you would have needed an income of approximately $507,058.82.

Step by step solution

01

Understand the Expression

First, it's important to understand that the change in the CPI from 1924 to 2016 implies a change in the purchasing power of money. In other words, a dollar in 1924 could buy more goods and services than a dollar in 2016 could, because inflation erodes the value of money over time. This can be represented as a ratio where the CPI in 1924 is the numerator and the CPI in 2016 is the denominator. This gives us the fraction 17/240.
02

Calculate the Equivalent 2016 Income

We will multiply Fitzgerald's 1924 income by the ratio of the 1924 CPI to the 2016 CPI. This will give us the equivalent 2016 income necessary to have the same purchasing power as $36,000 in 1924. So, we calculate \(36,000 \times \frac{240}{17}\) which equals $507,058.82, when rounded to the nearest cent.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Briefly describe the three major measures of the price level.

During a period of deflation, which is likely to increase faster: nominal average hourly earnings or real average hourly earnings? Briefly explain.

How is the unemployment rate measured? What are the three conditions someone needs to meet to be counted as unemployed?

What is the natural rate of unemployment? What is the relationship between the natural rate of unemployment and full employment?

What is the relationship between frictional unemployment and job search?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free