Under which of the following circumstances would we observe the greatest increase in real income?
A) Nominal income falls by 2 percent, and the price level falls by 10 percent.
B) Nominal income rises by 8 percent, and the price level rises by 4 percent.
C) Nominal income rises by 15 percent, and the price level rises by 12 percent.
D) Nominal income falls by 4 percent, and the price level rises by 6 percent.

Question

Quizplus · Accepted Answer

In option A, even though nominal income falls, the decrease in the price level is much greater, which would lead to a significant increase in real income. In contrast, options B, C, and D all have increases in nominal income, but they are accompanied by increases in price levels, which would not result in as large of an increase in real income.

Under Which of the Following Circumstances Would We Observe the Greatest