Assume That Nominal Income Is $35,000 and the Price Index

question 30

Essay

Assume that nominal income is $35,000 and the price index is 1.20 in year 1.In year 2, nominal income rises to $38,000 and the price index rises to 1.25.What was the percentage change in real income from year 1 to year 2? What was the absolute amount of increase in real income? Make your calculations of the percentage change in real income and the absolute change in real income using the approximation formula and using the more precise method with index numbers.

---

Definitions:

Price

The amount of money expected, required, or given in payment for something, reflecting the value that customers pay for goods or services.

Substitutes

Products or services that can replace each other in use, offering consumers choices in the marketplace.

Demand Curve

A graphical representation showing the relationship between the quantity of a good consumers are willing and able to purchase and its price.

Income

Money that an individual or business receives in exchange for providing a good or service or through investing capital.