In which of the following cases would real income rise?
A) Nominal income rises by 8 percent, and the price level rises by 10 percent.
B) Nominal income rises by 2 percent, and the price level remains unchanged.
C) Nominal income falls by 4 percent, and the price level falls by 2 percent.
D) Real income will rise in all of these cases.

Question

Quizplus · Accepted Answer

Real income is calculated by adjusting nominal income for changes in the price level. In option A, nominal income rises by 8 percent, but the price level rises by 10 percent, so real income falls. In option C, nominal income falls by 4 percent, and the price level falls by 2 percent, so real income actually rises. Option D is incorrect because as shown in options A and C, real income does not always rise. Option B is the correct answer because nominal income rises by 2 percent and the price level remains unchanged, resulting in a 2 percent increase in real income.

In Which of the Following Cases Would Real Income Rise