Suppose that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130. The person’s real income will a)

Suppose that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130. The person’s real income will
a) rise by about 4 percent.
b) rise by about 1 percent.
c) remain constant.
d) fall by about 1 percent.

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  1. Answer:

    b) rise by about 1 percent

    Explanation:

    Given that a person’s nominal income rises by 5 percent and the price level rises from 125 to 130.

    Percentage increase in price level = (130 – 125)/125

                                                             = 5/125

                                                              = 1/25 = 4%

    Difference between rise in the person’s nominal income and rise in price level

    = 5% – 4%

    = 1%

    Hence the right option is b) rise by about 1 percent.

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