MACROECONOMICS- what formula do I use?

Question

Mary's salary in year 1 was $40,000 and the CPI that year was 130. In year 2 her salary was $45,000 and the CPI was 150. Did her real salary increase or decrease? By what percent?

Does anyone know what formula to use for this question???

Answer 1

It means they ask you to calculate real change in salary (e.g. change of purchasing power) not nominal.

Calculation is following:

Change in salary =45'000/40'000=1.125 or +12.5%

12.5%=(1.125-1.0)*100

Change in price level =150/130=1.1538 or +15.38%

15.38%=(1.1538-1.0)*100

Real change in salary =1.125/1.1538=0.975 or -2.5%

-2.5%=(0.975-1.0)*100

Or direct method: ((45'000*130/(40'000 *150))-1)*100= -2.5%

♦ Answ: her real salary fell by -2.5%