Nominal income must have fallen if real income:
A) Falls and there is inflation.
B) Falls and there is deflation.
C) Rises and there is inflation.
D) Rises and there is deflation.

Question

Quizplus · Accepted Answer

Nominal income refers to the amount of money earned in current dollars, without adjusting for inflation or deflation. Real income adjusts nominal income for changes in price level to reflect the actual purchasing power. If real income falls and there is deflation, it implies that the purchasing power of the income has decreased even though prices are falling, suggesting that nominal income must have decreased for real income to fall in a deflationary environment. In all other scenarios, the relationship between nominal income and real income can vary depending on the rate of inflation or deflation relative to the change in nominal income.

Nominal Income Must Have Fallen If Real Income