Question

question 12 (1 point)
you find that your paycheck for the year is higher this year than last. does that mean that your real income has increased? explain carefully.

Explanation:

Nominal income (the paycheck amount) and real income (nominal income adjusted for inflation) are different. If inflation is higher than the increase in nominal income, real income decreases. If inflation is lower, real income increases.

Answer:

No. Just because the nominal income (paycheck) is higher doesn't mean real income increased. Real income = \(\frac{\text{Nominal Income}}{\text{Price Index}}\). If inflation (increase in price index) is greater than the increase in nominal income, real income falls. For example, if nominal income rises by 3% but inflation is 5%, real income decreases. Only when the percentage increase in nominal income exceeds the percentage increase in the price level (inflation rate) does real income increase.