Last year Amali earned $60,000 salary. This year, her income was $62,000. Inflation in the economy in the last year was 7%. Which of the following statement is true?

Question

BlackTom AI · Accepted Answer

Nominal income is the dollar amount received; real income is nominal income adjusted for changes in the price level (inflation), and therefore measures purchasing power.

1) Relevant concepts
- Nominal income: actual dollars earned (here $60,000 → $62,000).
- Inflation: general rise in prices; when inflation is positive, each dollar buys less.
- Real income: nominal income deflated by (divided by) the inflation factor to express purchasing power in constant dollars.

2) Step-by-step reasoning
- Compare nominal incomes directly: $62,000 (this year) > $60,000 (last year), so nominal income rose.
- To see real change, adjust this year’s nominal income for inflation to express it in last year’s dollars: divide by (1 + inflation rate).

3) Calculations (all intermediate steps)
- Nominal percent change = (62,000 − 60,000) / 60,000 = 2,000 / 60,000 = 0.033333... = 3.3333% increase.
- Inflation = 7% = 0.07, so inflation factor = 1.07.
- This year’s real income in last-year dollars = 62,000 / 1.07 = 57,943.925... ≈ $57,944.
- Real percent change = (57,943.925 − 60,000) / 60,000 = −2,056.075 / 60,000 ≈ −0.034268 = −3.4268%.

4) Why the correct answer is correct
- Although Amali received more dollars (nominal ↑ by ~3.33%), prices rose faster (inflation 7%), so her purchasing power fell: her real income in last-year dollars is about $57,944, lower than $60,000. Thus nominal increased but real decreased.

5) Why the other options are incorrect
- b (both increased): incorrect because real income fell after adjusting for 7% inflation.
- c (both decreased): incorrect because nominal income actually increased from $60,000 to $62,000.
- d (nominal decreased but real increased): incorrect on both counts—the nominal did not decrease and real did not increase.

6) Conclusion
- The correct statement is a. Amali's nominal income has increased but her real income has decreased. This matches the provided answer.

Last year Amali earned $60,000 salary. This year, her income was $62,000. Inflation in the economy in the last year was 7%. Which of the following statement is true?Single choice

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