A person's real income will increase by 3% if her nominal income increases by select one:

a. 5% while the price index falls by 2%.

b. 5% while the price index rises by 2%.

c. 2% while the price index rises by 5%.

d. 2% while the price index falls by 5%.

To answer this question, first let us determine the effect of rise/fall of the nominal income and price index on the real income.

As nominal income increases, real income increases.

As nominal income decreases, real income decreases.

As price index increases, real income decreases.

As price index decreases, real income increases.

A. 5% + 2% = 7%

B. 5% - 2% = 3%

C. 2% - 5% = - 3%

D. 2% + 5% = 7%

Therefore the answer is letter B.