Question

Real, rather than nominal, figures are important to use when making comparisons of incomes across time periods because

a. the real figures are adjusted for changes in taxes.
b. the real figures are adjusted for changes in the general level of prices.
c. the real figures are adjusted for changes in the average hours worked per week.
d. the real figures are adjusted for changes in the level of interest rates.

Answer 1

The correct answer is option b.

Step-by-step explanation:

The real variables are the inflation-adjusted variables. They are adjusted for changes in the price level over the years.

For instance, the nominal GDP is not inflation-adjusted. It includes the change in prices as well as a change in output. The real GDP is the inflation-adjusted measure to calculate the change in economic output.

The nominal income is in money terms. The real income is adjusted for inflation. Real income reflects the purchasing power of income. Real income is calculated at a constant price while nominal income is calculated at a constant price.

So the real figures are able to present a more accurate view of the change in variables. That is why it is important to use real figures instead of nominal figures when making comparisons across time periods.