Question

Imagine that at the end of 2014 your monthly income in money terms was £2000 per month while the index of retail prices was 100. At the end of 2015, your monthly income was £2100 while the index of retail prices was 110. During 2015, how much had your real income changed?

a. increased by gbp 100.
b. fallen by 10 per cent.
c. increased by 5 per cent.
d. fallen by 5 per cent.

Answer 1

To calculate the change in real income, divide the nominal income by the index of retail prices and multiply by 100. The change in real income is negative, indicating a decrease of approximately 5%.

Step-by-step explanation:

To calculate the change in real income, we need to calculate the change in purchasing power by taking into account the change in the index of retail prices. We can use the formula:

Real Income = (Nominal Income / Index of Retail Prices) * 100

For the end of 2014:
Real Income = (£2000 / 100) * 100 = £2000

For the end of 2015:
Real Income = (£2100 / 110) * 100 = £1909.09

To calculate the change in real income:
Change in Real Income = Real Income at the End of 2015 - Real Income at the End of 2014
Change in Real Income = £1909.09 - £2000 = -£90.91

Therefore, the correct option is fallen by 5 per cent (d) since the change in real income is negative and represents a decrease of approximately 5%.