Question

One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 15%. After five years, this family's nominal income ______, and their real income ______.A. decreased; also decreasedB. decreased; increasedC. increased; did not changeD. increased; also increased

Answer 1

After five years, this family's nominal income increased, and their real income did not change.

Option: (C)

Explanation:

• While taking into consideration the nominal income of the family, the increase in consumer price index and its effect on their spending capacity is not taken into consideration. Hence, the 'nominal' income of the family here can be said to have increased.
• As far as 'real income' is concerned, the change in the consumer price index is also taken into consideration. In this case, the increase in the CPI is equal to the increase in the income of the family over the last five years. The increased CPI dismisses the increase in the income of the family and keeps it unchanged in terms of 'real' income.