Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases
B
It stays the same
C
It increases
D
It becomes negative
Understanding the Answer
Let's break down why this is correct
Answer
When nominal income increases by 5%, it means that people in Flower Land are earning more money, but inflation is rising even faster at 7%. Inflation is the rate at which prices for goods and services increase, which means that the same amount of money buys less over time. In this case, even though people have more money, the prices of things they want to buy are going up more quickly than their income. This results in a decrease in purchasing power, meaning people can buy less with their money than before. For example, if a loaf of bread costs $1 now, and with 7% inflation it costs $1.
Detailed Explanation
When prices go up faster than income, you can buy less with your money. Other options are incorrect because Some might think that if income goes up, purchasing power stays the same; It's a common mistake to think any income increase means more buying power.
Key Concepts
Inflation
Purchasing Power
Nominal Income
Topic
Inflation and Standard of Living
Difficulty
easy level question
Cognitive Level
understand
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