If the inflation rate in an economy is 5 percent and the income earned by workers increases by 5 percent,then _____.
A)nominal income declines and real income increases
B)both nominal income and real income increase by 5 percent
C)nominal income increases and real income declines
D)both nominal income and real income decrease by 5 percent
E)nominal income increases by 5 percent and real income is unchanged

Question

Quizplus · Accepted Answer

When the inflation rate and income earned by workers increase by the same percentage, nominal income increases by the same percentage as the inflation rate (5 percent in this case), but the real income remains unchanged. Therefore, the best choice is E, "nominal income increases by 5 percent and real income is unchanged."

If the Inflation Rate in an Economy Is 5 Percent