Question

1. Explain briefly how to convert nominal variables into real variables

2. Suppose nominal income in year 2000 is $3000 and the price index in year 2000 is 150, what is the real income of year 2000?

3.Suppose the nominal output this year is $1000 billion while the current price level is measured at 120, what is the real output this year ?

4. Jane makes a loan at 3% interest rates. The inflation rate is 2%. What is the real interest rate?

Answer 1

1) The Nominal variable are the actual values which are measured at that time. Real variable are adjusted values. Nominal variable are converted to real variable by choosing an base year and than using different index value to convert it.

2) Real income = (Nominal income / Price level )*100

Real income = (3000/150)*100

Real income = $2000

3) Real output = (Nominal output/ Price level )*100

Real output = (1000/120)*100

Real output = 833.33 billion

4) Real interest rate = Nominal interest rate - inflation

Real interest rate = 3% - 2%

Real interest rate = 1%