Question

In year 1, the Consumer Price Index was 120 and the average nominal income was $30,000. In year 2, the Consumer Price Index was 125 and the average nominal level of income was $32,000. What happened to real income from year 1 to year 2?

Answer 1

Answer:

Real income has increased by $720 in terms of dollar and 2% in percentage

Explanation:

The real income is determined by adjusting the nominal income for inflation. The consumer price index (CPI) is used to measure the rate of inflation.

Real income = Nominal income × CPI Base year/ CPI in current year

Real Income =         32000 × 120/125

                                =$30,720

Change Real income

Change in real income ($) = 30,720 - 30,000

                                        = $ 720  

Change in real income (%)  =  (720/30,000) × 100

                                      = 2%

Real income has increased by $720 in terms of dollar and 2% in percentage