Question

If the growth rate in nominal income is larger than the inflation rate (as measured by the change in the CPI or the GDP deflator), the real value of income has: increased since real income has grown faster than the price index. Decreased since nominal income has grown faster than the price index. Increased since nominal income has grown faster than the price index. Decreased since real income has grown slower than the price index.

Answer 1

Increased since nominal income has grown faster than the price index

Step-by-step explanation:

To answer this question one must know the conceptual difference between nominal income and real income. Nominal income is the gross value of the increase in income, without discounting the value of inflation. Real income is the value of income after the calculation that discounts the inflation variation of nominal income. Thus, real income can be positive, which means that there has been a real increase in consumer income, or negative, when real labor income has grown below the inflation rate (impoverishment process).

Thus, if the nominal income growth rate is higher than the inflation growth rate, there is a real income growth, since the nominal income growth was higher than the inflation index growth. This generates an increase in real income, which has a positive balance.