Question

Nancy's union has negotiated a wage contract that provides for a 2.4% annual increase indexed to inflation. The rate of inflation is forecasted to be 1.6% next year. If she makes currently makes $70,000 per year, by how much will her yearly income increase next year?

Group of answer choices

$560

$2,800

$1,680

$1,120

Answer 1

The real increase in income is given as 2.6% and the expected inflation rate is 1.4%. So, the nominal rate of increase in income is 2.6% + 1.4% which equals 4%. If the current income is $70,000 then the income will be (70,000) (1.04) = $72,800 next year. So, the income will increase by $2,800 next year. Therefore, the correct answer is 'Option B'.