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18 January, 03:10

In year 1, the Consumer Price Index was 120 and the average nominal income was $30,000. In year 2, the Consumer Price Index was 125 and the average nominal level of income was $32,000. What happened to real income from year 1 to year 2?

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  1. 18 January, 03:24
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    Real income has increased by $720 in terms of dollar and 2% in percentage

    Explanation:

    The real income is determined by adjusting the nominal income for inflation. The consumer price index (CPI) is used to measure the rate of inflation.

    Real income = Nominal income * CPI Base year / CPI in current year

    Real Income = 32000 * 120/125

    =$30,720

    Change Real income

    Change in real income ($) = 30,720 - 30,000

    = $ 720

    Change in real income (%) = (720/30,000) * 100

    = 2%

    Real income has increased by $720 in terms of dollar and 2% in percentage
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