Question

Could I get some explaining of the following situations please thank you :)

IF NOMINAL INCOME RISES FASTER THAN THE INCREASE IN THE PRICE LEVEL

IF NOMINAL INCOME STAYS THE SAME AND THE PRICE LEVEL RISES

IF NOMINAL INCOME RISES AND THE PRICE LEVEL STAYS THE SAME

Answer 1

%change in Nominal Income = %change in price level + %change in real Income

Nominal income is the income measured in terms of dollars while real income is the income measured in terms of units consumed.

a) If change in nominal income > change in inflation rate, there must be positive change in real income. Positive real income helps people in raising their purchasing capacity.

b) If change in nominal income stays same as change in inflation rate, there is fall in real income. Labor / Employees will be demotivated by fall in their purchasing power or we can say that they can buy less units of goods from the same dollar.

c) If nominal income rises and price level remains the same, there is an increase in real income. Labor class will be morer happy by getting this salary hike.