Question

5. If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation? (explain in your own words)

Answer 1

Answer 5 : First case :

% Increase in nominal income = 5.3%

% Increase in price level = 3.8%

% increase in real income = 5.3%- 3.8% = 1.5%

Second case :

% increase in nominal income = 2.8%

% increase in real income = 1.1%

% increase in inflation rate = 2.8%- 1.1% = 1.7%

Rate of inflation means increase in the price level where as nominal income means total income increased . Real income means actual income increased in an economy after deducting price level. It means that nominal income has been increased 2.8% , real income increased increased by 1.1%. This shows that inflation rate is1.7%.