If a person's nominal income increases by 5 percent while the price level increases by 2 percent, then that person's real income
A) increases by 3 percent.
B) increases by 5 percent.
C) decreases by 7 percent.
D) decreases by 2 percent.

Question

Quizplus · Accepted Answer

Real income is calculated by adjusting nominal income for changes in the price level. Since the price level has increased by 2 percent, the nominal income increase of 5 percent must be adjusted by subtracting 2 percent. Therefore, the real income increase is 3 percent.

If a Person's Nominal Income Increases by 5 Percent While