Question
Asked Oct 20, 2019
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Suppose you compare your income this year and last year and find that your nominal income fell but your real income rose. How could this have happened?

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Expert Answer

Step 1

Nominal income refers to the income received by an individual whereas real income also takes inflation rate into account. Real income can be calculated by dividing the nominal income by the price level.

 

Step 2

Suppose the initial income is $10,000 and it falls to $9,000 in the next year then ($10,000 - $9,000) is the change in nominal income as the nominal income falls by $1,000. Similarly, for the given scenario, assuming the inflation reduced by 20% for that particular year then:

Step 3

Threfore, it can be i...

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$10,000 in last year = $8,000 in the current year

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