Question

Upon graduating from college this year, you expect to earn $25,000 per year. If you get your MBA, in one year you can expect to start at $35,000 per year. Over the year, inflation is expected to be 5 percent. In today's dollars, how much additional (less) money will you make from getting your MBA (to the nearest dollar) in your first year?

Answer 1

If you are graduating this year, your salary = $25,000

If you are graduating next year, your salary = $35,000

One year expected inflation rate = 0.05

 

Therefore, in nominal terms, the increase in wage/ salary over 1 year = $35,000 - $25,000 = $10,000. Thus, $10,000 is the notional difference in the salary over 1 year.

 

However, that is not the real increase in income for you, because, real income is the actual income or money that an individual earns after taking into account the inflation. This is also called the real wage.

 

The real wage can be calculated as:-

Real income/Wage = Wages ÷ (1+inflation rate)

Hence, your real income/wage after 1 year = $35,000 ÷ (1+0.05)

                                                                             = $35000 × (1/1.05)

                                                                             = $35,000 × 0.952380952

                                                                             = $33,333.33

 

Thus, the difference between the two wages would be = $33,333.33 - $25,000 

                                                                                                  = $8,333.33

 

Hence, you will be making $8,333.33 less money if you get your MBA this year.

Hence, you will be making $8,333.33 less money if you get your MBA this year.