Question

Norma receives an increase in her nominal income. She complains that the current inflation rate of six percent erodes the real purchasing power of her additional nominal income. This is true a. only if the increase in her nominal income is less than six percent. b. since inflation always reduces purchasing power. c. only if the increase in her nominal income is more than six percent. d. only if her real income increases.

Answer 1

Answer:

a. only if the increase in her nominal income is less than six percent.

Explanation:

Inflation describes the rate of price increment in the economy over time.  A rise in inflation means that the prices of goods and services in the country are also rising. High inflation erodes the purchasing power of a currency.

Norma will not feel the effect of an increase in her income if the rise is lower than the inflation rate. An inflation rate of 6 per cent means that the prices of good and service have gone up by that 6 per cent. Her purchasing power is lower by 6 per cent. For an increment in income to benefit her, it must be above the inflation rate.