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Inflation and Standard of Living
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A rise in nominal income always leads to an improvement in the standard of living, regardless of the inflation rate. True or False?

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Choose the Best Answer

A

True

B

False

C

It depends on the type of goods purchased

D

It is true only in a deflationary economy

Understanding the Answer

Let's break down why this is correct

Answer

The statement is false. A rise in nominal income means that people earn more money, but it does not automatically mean that their standard of living improves if inflation is also high. Inflation is when the general prices of goods and services increase, which can reduce the purchasing power of that income. For example, if someone’s income rises by 5% but inflation is 6%, they can actually afford less than before, making their living standard worse. Therefore, it is important to consider both income and inflation together to understand changes in living standards.

Detailed Explanation

A rise in nominal income does not always mean a better standard of living. Other options are incorrect because Some might think that more money always means better living; This suggests that it only matters what you buy.

Key Concepts

Inflation
Standard of Living
Nominal Income
Topic

Inflation and Standard of Living

Difficulty

medium level question

Cognitive Level

understand

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