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25 November, 13:15

In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2

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  1. 25 November, 16:29
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    There was an increase in real income from year 1 to year 2 by a value of 600

    Explanation:

    In this question, we are asked to explain what happened to real income from Year 1 to Year 2.

    We calculate that as follows.

    Kindly note that CPI (consumer price index) is same as price level in this case

    Mathematically, real income = (income/CPI) * 100

    In Year 1, real income = (30,000/120) * 100 = 25000

    In Year 2, real income = (32,000/125) * 100 = 25,600

    The question asked what happened to real income from year 1 to year 2. What happened is that there was an increase of 25600-25000 = 600 in real income from year 1 to year 2
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