In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real
Income from Year 1 to Year 2?
A) It fell by $400.
B) It rose by $400.
C) It rose by $600.
D) It rose by $2,000.

Question

Quizplus · Accepted Answer

Real income adjusts nominal income for inflation to reflect purchasing power. To calculate real income change, first find the real income for each year using the formula: Real Income = Nominal Income / (Price Level / 100). For Year 1, it's $30,000 / (120 / 100) = $25,000. For Year 2, it's $32,000 / (125 / 100) = $25,600. The difference is $25,600 - $25,000 = $600, indicating real income rose by $600.

In Year 1, the Price Level Was 120 and the Average