Scenario 24-1

Question

Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2017. Suppose the price index was 17.6 in 1944 and 218.4 in the current year.

Refer to Scenario 24-1. Josh Holloway's current year income in 1944 dollars is
a. $11,528.
b. $149,009.
c. $16,923.
d. $26,059.

Answer 1

To convert Josh Holloway's current year income into 1944 dollars, you need to use the price index to adjust for inflation between the two years. The formula to convert current dollar amounts to inflation-adjusted dollars is:

\[ \text{Inflation-Adjusted Income} = \left( \frac{\text{Price Index in Old Year}}{\text{Price Index in Current Year}} \right) \times \text{Current Year Income} \]

For this scenario:

• Price Index in 1944 = 17.6
• Price Index in 2017 = 218.4
• Current Year Income = $210,000

Now plugging in the values:

\[ \text{Inflation-Adjusted Income} = \left( \frac{17.6}{218.4} \right) \times 210,000 \]

Calculating the fraction:

\[ \frac{17.6}{218.4} \approx 0.0806 \]

Now, multiply this fraction by Josh's income:

\[ \text{Inflation-Adjusted Income} \approx 0.0806 \times 210,000 \approx 16,926 \]

Rounding this gives approximately $16,923.

Thus, the answer is:

c. $16,923.