Final answer:
When a person's nominal income rises by 5 percent and the price level rises from 130 to 135 their real income will rise by about 1 percent after adjusting for inflation.
Step-by-step explanation:
Suppose that a person's nominal income rises by 5 percent and the price level rises from 130 to 135. What will happen to the person's real income? To calculate the change in real income, we must adjust the nominal income change by the change in price level, also known as inflation. the price level initially is 130 and rises to 135, which is an increase of 5/130, or approximately 3.85 percent. The nominal income increases by 5 percent, but once we account for the 3.85 percent increase in price level, the real income only increases by the difference, which is approximately 5 - 3.85 = 1.15 percent.
Therefore, the person's real income will rise by about 1 percent, which corresponds to option 4.