Suppose an individual receives $1000 per month in Social Security and the CPI rises by 2%....

Suppose an individual receives $1000 per month in Social Security and the CPI rises by 2%. With indexation, what happens to the nominal payment and the real payment the following year?

Expert Solution

$ 1000 is base year income when there is no change in CPI , so real income = nominal income . Now % change in CPI measures inflation . So CPI rises by 2% means there is 2% inflation . Now social security payment remains constant . So after indexation ,

Nominal payment = $1000 .

Real payment = Nominal - Inflation rate = 1000 - 2% of 1000 = 1000 - 20 = $980 .

Rahul Sunny answered 2 years ago

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