If nominal income increases by 3 percent and real income increases by 4 percent, the price level must:

Question

Quizplus · Accepted Answer

Nominal income accounts for inflation, whereas real income is adjusted for inflation, showing the actual increase in purchasing power. If nominal income increases by 3% but real income increases by 4%, it means the price level (inflation) has actually decreased, making each unit of currency go further than before. The difference (4% - 3% = 1%) indicates the decrease in the price level, hence a 1% decrease.

If Nominal Income Increases by 3 Percent and Real Income