Norma complains that she is not receiving the full benefit of her six percent raise,because inflation is two percent.You tell her that nominal incomes tend to rise with inflation,therefore
A)she really is worse off.
B)her real income increased eight percent.
C)menu costs have reduced her purchasing power.
D)she is committing the inflation fallacy.

Question

Quizplus · Accepted Answer

Norma is committing the inflation fallacy, which is the mistaken belief that inflation erodes real income when nominal income rises at a rate higher than inflation. Her real income has actually increased by four percent (6% raise - 2% inflation).

Norma Complains That She Is Not Receiving the Full Benefit