Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Purchasing power decreases
B
Purchasing power increases
C
Purchasing power remains the same
D
Purchasing power is unaffected by inflation
Understanding the Answer
Let's break down why this is correct
Answer
When nominal income increases by 5%, it means you are earning more money, but if inflation is at 8%, the prices of goods and services are also rising. This situation can decrease your purchasing power, which is the ability to buy things with your money. For example, if you have $100 before the changes, a 5% increase means you now have $105. However, because inflation is at 8%, the prices of what you can buy with that $105 have increased, making it feel like you have less money to spend. In this case, your purchasing power has actually gone down, meaning you can buy fewer things than before despite earning more money.
Detailed Explanation
When prices go up faster than your income, you can buy less. Other options are incorrect because Some might think that if income rises, you can buy more; It's a common mistake to think that income and prices balance each other out.
Key Concepts
Inflation
Nominal Income
Purchasing Power
Topic
Inflation and Standard of Living
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.