IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation
A consumer price index (base year 100) stood at 150 in 2023 and 165 in 2024. A pension of Rs 60,000 per year was unchanged in nominal terms between the two years. What was the approximate real value of the pension in 2024 in 2023 prices?
The real value is about Rs 54,545. Prices rose by 10 percent (165 divided by 150), so the unchanged nominal pension of Rs 60,000 is deflated by multiplying by 150/165, giving a lower purchasing power in 2023 prices.
- ARs 66,000
- BRs 60,000
- CRs 54,545Correct
- DRs 51,000
- Rs 57,000
Explanation
Inflation over the year = 165/150 = 1.10, i.e. 10%. Real value in 2023 prices = 60,000 x 150/165 = 54,545. Rs 66,000 inflates instead of deflating, using the wrong direction. Rs 54,000 would result from subtracting 10% of 60,000 and is not offered; Rs 51,000 and Rs 57,000 do not follow from the data.
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