If the price level increases by 15 percent while nominal income increases by 8 percent, then in percentage terms real income would:
A)rise by about 8 percent.
B)fall by about 8 percent.
C)fall by about 7 percent.
D)fall by about 15 percent.

Question

Quizplus · Accepted Answer

Real income is the purchasing power of nominal income, which is calculated as (nominal income/price level).

If the price level increases by 15 percent, the denominator in the real income formula grows by 15 percent. If nominal income increases by 8 percent, the numerator grows by 8 percent.

Therefore, real income would be (nominal income/1.15) which is about 0.8696 times nominal income. In percentage terms, this is equivalent to a decrease of about 7 percent ((1 - 0.8696) x 100). Hence, the correct answer is C.

If the Price Level Increases by 15 Percent While Nominal