Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105.The person's real income will:
A)fall by about 20 percent.
B)fall by about 2 percent.
C)rise by about 25 percent.
D)rise by about 15 percent.

Question

Quizplus · Accepted Answer

To calculate the real income, we need to adjust the nominal income by the inflation rate. The inflation rate is the percentage increase in the consumer price index, which is (105 - 100)/100 = 5%. Therefore, the real income is $12,000/(1 + 0.05) = $11,428.57. The percentage increase in real income is ((11,428.57 - 10,000)/10,000) x 100% = 14.29%, which is about 15%. Therefore, the correct answer is D) rise by about 15 percent.

Suppose That a Person's Nominal Income Rises from $10,000 to $12,000