Question

24

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?

    

b. If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation?

    

Answer 1

The Fisher equation implies that the real rate of interest equals the nominal rate of interest minus the expected rate of inflation.

a) Increase in real income equals an increase in nominal income minus the increase in price level.i.e.5.3%-3.8% =1.5%

b) inflation rate equals the nominal rate of interest minus the real rate of interest by adjusting the Fisher equation; 2.8%-1.1% =1.7%