(Q11 IN TYPE B)ASSUME YOUR UNCLE RECORDED HIS SALARY HISTORY DURING...

6. (Q11 in Type B)Assume your uncle recorded his salary history during a 40-year career and found that it had increased ten-fold (i.e., his salary at the end of his career was 10 times his salary at the beginning). If inflation averaged 5% annually during the period, how would you describe his purchasing power, on average? A) His purchasing power remained on par with inflation. B) He “beat” inflation by nearly 1% annually. C) He “beat” inflation by slightly over 2% annually. D) He “beat” inflation by 5% annually. Solution B. For the annual increase in his nominal salary, r = (FV/PV)

^1/t

– 1 = (10)

^1/40

– 1 = 5.93%. By either the exact formula or the approximation, this is a real increase of nearly 1 percentage point.