   Chapter 6, Problem 2QP

Chapter
Section
Textbook Problem

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.

To determine

The change in real income and nominal income.

Explanation

The real income is obtained as the ratio of nominal income to the CPI as given in Equation (1).

Real income=(Nominal incomeCPI)×100        (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: Real income1=I1CPI1=(25,000100)×100=25,000 Thus, real income in year 1 is$25,000

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