Final answer:
With the price level increasing by 1% while Luke's nominal income remained the same in 2010, Luke's real income decreased, reducing his purchasing power and standard of living.
Step-by-step explanation:
In 2010, if Luke's nominal income was unchanged while the price level rose by 1%, Luke's real income, which is the purchasing power of his earnings, effectively decreased.
This is due to inflation, where the general increase in prices means that the same amount of nominal currency will buy less than it would before. To maintain the same standard of living, Luke's nominal income needs to increase at the same rate as inflation.
If his nominal income does not adjust to match inflation, he can afford fewer goods and services with his unchanged income, ultimately leading to a decline in his real income.
If we refer to the scenario given that a fixed basket of goods increased in cost by 25% over the past 10 years and an individual's salary also increased by 25%, the person's standard of living would have held constant.
This is because their increased income compensates for the higher costs due to inflation, allowing them to maintain the same level of consumption. Conversely, Luke was unable to sustain his standard of living because his income did not increase in accordance with the rise in the price level.