Question

If a person's nominal income increases by 5% while the price level increases by 2%, then that person's real income:

Answer 1

Answer:

r=2.9%

Explanation:;

The person real income is the income which has been adjusted for inflation and can be calculated using the below formula:

(1+r)(1+i)=(1+n)

r= real income increase%=?

n=nominal income increase%=5%

i=price level increase%=2%

(1+r)(1+2%)=(1+5%)

1+r=(1+5%)/(1+2%)

1+r=1.029

r=1.029-1

r=0.029

r=0.029*100=2.9%