1. Suppose, hypothetically, that inflation is 3% per year and suppose that the graph of your salary in constant dollars looks like the graph below: Is your salary in actual, non-constant dollars A. increasing B. constant C. decreasing D. cannot be determined from information given.

2. Suppose, hypothetically, that inflation is 3% per year and suppose that the graph of your salary in constant dollars looks like the graph below: Is your salary in actual, non-constant dollars A. increasing It has to increase at a rate of 3% to keep up with inflation. The constant dollar graph says that you “feel the same” each year. In order for that to be the case your percentage raise has to match the percentage increase of rent, transportation, food, etc.

3. Suppose, hypothetically, that inflation is 3% per year and suppose that the graph of your salary in constant dollars looks like the graph below: Is your salary in actual, non-constant dollars A. increasing B. constant C. decreasing D. cannot be determined from information given.

4. Suppose, hypothetically, that inflation is 3% per year and suppose that the graph of your salary in constant dollars looks like the graph below: Is your salary in actual, non-constant dollars The correct answer is D: cannot be determined from the information given. We can imagine a situation for each scenario where the constant dollar graph looks like it does in the picture. The trickiest situation is one in which your actual dollars are increasing at a percentage that is below 3%. This would still result in your constant dollar graph looking as it does to the right; decreasing value of your salary.