Suppose your nominal income this year is 5 per cent higher than last year. If the inflation rate for the period was 3 per cent, then your real income:
A) increased by 1.67 per cent.
B) increased by 2 per cent.
C) increased by 8 per cent.
D) declined by 0.6 per cent.

Question

Quizplus · Accepted Answer

Real income is the purchasing power of nominal income. To calculate real income, we need to adjust nominal income for inflation. In this case, we can use the following formula:

Real income = Nominal income / (1 + inflation rate)

Using the numbers given in the question, we get:

Real income = 1.05 / (1 + 0.03) = 1.0194

This means that your real income increased by 1.94% (or approximately 2%) after adjusting for inflation. Therefore, the correct answer is B.

Suppose Your Nominal Income This Year Is 5 Per Cent