Question:
Assume that in a given time period, the general price level of a country tripled. In the same period, the income level of a certain household rose from Rs. 40 000 to Rs. 80 000. What happened to this household’s nominal and real income?
(1) Nominal Income: Increased; Real Income: Decreased
(2) Nominal Income: Decreased; Real Income: Decreased
(3) Nominal Income: Increased; Real Income: Increased
(4) Nominal Income: Decreased; Real Income: Increased
(5) Nominal Income: Increased; Real Income: Unchanged
Correct Answer:
(1)
Answer Explanation:
Nominal income clearly increased (from 40k to 80k, doubling). However, because the general price level tripled (increased by 200%), inflation outpaced the nominal income growth. Consequently, the household’s purchasing power (Real Income) decreased.
Topic: Inflation Year: 2021
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