Question

Which of the following statements about inflation is correct? a. Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently than other economic terms, such as unemployment and productivity. b. People believe the inflation fallacy because they tend to believe too strongly in the principle of monetary neutrality. c. Nominal incomes are determined by nominal factors; they are not affected by real factors. d. Inflation does not in itself reduce people’s real purchasing power.

Answer 1

Answer:

c. Nominal incomes are determined by nominal factors; they are not affected by real factors.

Explanation:

Real value is nominal value adjusted for inflation. The real value is obtained by removing the effect of price level changes from the nominal value of time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data such as gross domestic product and incomes is adjusted by a deflator to derive their real values.

The nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years. For a series of nominal values in successive years, different values could be because of differences in the price level. But nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year.