Question

In the year 1 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:

The real income increased by $600

Explanation:

Data provided in the question:

Consumer Price Index in year 1 = 120

Consumer Price Index in year 2 = 125

Average nominal income in year 1 = $30,000

Average nominal income in year 2 = $32,000

Now,

We know

Real income = [ ( Nominal income ÷ CPI) ] × 100

Thus,

Real income in year 1 =[ ( $30,000 ÷ 120) ] × 100

= $25,000

Real income in year 2 = [ ( $32,000 ÷ 125 ) ] × 100

= $25,600

Therefore,

The change in real income from year 1 to year 2

= Real income in year 2 - Real income in year 1

= $25,600 - $25,000

= $600

The positive value means an increase

Hence,

The real income increased by $600