If the inflation rate is 5 percent and you receive a wage increase of 5 percent,
A)your nominal income declines but your real income increases
B)both your nominal income and your real income increase by 5 percent
C)your nominal income increases but your real income declines
D)both your nominal income and your real income decrease by 5 percent
E)your nominal income increases by 5 percent but your real income is unchanged

Question

Quizplus · Accepted Answer

When the inflation rate is 5 percent and you receive a wage increase of 5 percent, your nominal income (the amount of money you earn in dollars) will increase by 5 percent. However, your real income (the purchasing power of your income) will remain unchanged. This is because the increase in your nominal income is offset by the increase in prices due to inflation. Therefore, E is the correct answer.

If the Inflation Rate Is 5 Percent and You Receive