Suppose your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year. Instructions: Round your answers to 1 decimal place. a. By what percentage would your real income (approximately) increase?

approximately 11%

Explanation:

If the wage increase was higher than inflation, it means the consumer was better off. He or she will have an increase in purchasing power.

To find the value, simply use the formula for calculating real profitability, which is the division between the value of the percentage increase in salary by the percentage increase in inflation, both plus 1. In the end, just decrease 1.

Real return = (1 + nominal return / 1 + inflation) - 1

Real profitability = (1 + 0.53 / 1 + 0.38) - 1

Real profitability = 1.53 / 1.38 - 1

Real profitability = 1,108 - 1

Real profitability = 0.108, which is approximately 11%.

Thus, the actual increase in purchasing power was approximately 11%.