Economics (MindTap Course List)
Solutions
Economics (MindTap Course List)
Show that, if the percentage rise in prices is equal to the percentage rise in nominal income, then one’s real income does not change.
The change in real income and nominal income.
The real income is obtained as the ratio of nominal income to the CPI as given in Equation (1).
Let one assume that the nominal income in year 1(I1) is $25,000 and the CPI1 in year 1 is 100.
The real income in year 1 can be calculated by substituting the respective values in Equation (1) as follows:
Thus, real income in year 1 is $25,000
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