Last year the Jones family earned $40,000. This year their income is $42,000. In an economy with an inflation rate of 10 percent, which of the following is correct?

Question

Quizplus · Accepted Answer

Nominal income has increased from $40,000 to $42,000, but the real value of their income has fallen due to the inflation rate of 10 percent. Inflation reduces the purchasing power of money, so the amount of goods and services that can be bought with the same amount of money has decreased. Therefore, the Jones' nominal income has increased, but their real income has fallen.

Last Year the Jones Family Earned $40,000