Nominal income, price level and purchasing power Suppose Jane gets a raise in salary of 10%...
- Nominal income, price level and purchasing power
Suppose Jane gets a raise in salary of 10% and she finds that her cost of living (the price level) has increased by 15%, what happens to her purchasing power?
Homework Answers
We can do this with the help of a example.
Suppose if Jane initially earns $200
After 10% his income becomes $220
Suppose the price of a shirt is $100
After 15 % increase, the new price becomes $115
So we can see initially Jane could buy (200/100)=2 shirts and he can buy only (220/115)=1.913 shirts
So now , her purchasing power decreases by ((2-1.913)/2)*100 = 4.545%
We can say that Jane’s purchasing power decreases and it decreases by 4.545%
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