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Chrome File Edit View History Bookmarks People window Help 0 xG the infation rate in an econeGradbook https:// cengage.com/products/WMZNB8076YXVXFX1R373/casQuizzes/77e720b7-6ba2-4e69-846e-1b3943457db27attemptid-eal Econ Macros ASSIGNMENTS STUDYBOARD 9125 f the inflation rate in an economy is 5 percent and the income earned by workers increases by 5 percent, then both nominal income and real income decrease by 5 percent both nominal income and real income increase by 5 percent nominal income increases and real income declines nominal income increases by 5 percent and real income is unchanged nominal income decines and real income increses CONTINUE

Explanation / Answer

Real Income(y) = Nominal Income(Y)/Price level(P)

yt = Yt/Pt

Take log on both side :

Log yt = log Yt-LogPt

Differentiate wrt ;t’

1/yt*(dyt/dt) = 1/Yt*(dYt/dt) – 1/Pt*(dPt/dt)

1/yt*(dyt/dt) = Change or growth in real income

1/Yt*(dYt/dt) = change or growth in nominal income = 5%

1/Pt*(dPt/dt) = change in price level over time = inflation rate = 5%

Thus 1/yt*(dyt/dt) = 5%-5%

1/yt*(dyt/dt) = change in real income = 0

Thus the correct option is d.

Nominal income increases by 5% but real income has no change and stays unchanged.

Please vote if possible.

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