Suppose that a person's nominal income rises by 5 percent and the price level rises from 125 to 130. The person's real income will

a) rise by about 4 percent.

b) rise by about 1 percent.

c) remain constant.

d) fall by about 1 percent.

b) rise by about 1 percent

Explanation:

Given that a person's nominal income rises by 5 percent and the price level rises from 125 to 130.

Percentage increase in price level = (130 - 125) / 125

= 5/125

= 1/25 = 4%

Difference between rise in the person's nominal income and rise in price level

= 5% - 4%

= 1%

Hence the right option is b) rise by about 1 percent.