Explain how an increase in your nominal income and a decrease in your real income might...

Explain how an increase in your nominal income and a decrease in your real income might occur simultaneously. Who loses from inflation? Who gains? (10) (answer in your own words)

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Expert Solution

answer :

Nominal income : nominal income is the monetary value of income means income is expressed in money.

Real income : real income is purchasing power of our income or currency. It is an income adjusted to inflation.

If nominal income increases or wages/salary of a person increases but the prices of goods and services also increases more than the nominal income it will lead to decrease in real income because increase in prices leads to decrease in purchasing power.

So if nominal income increases by 5% and prices rise 10 % than it will decrease the real income. As due to increase in prices the purchasing power of money has decreased.

Loses from inflation:

Creditors
Salaried persons (as their salaries are slow to adjust with price rise)
Fixed income group
People who invest in debentures, securities, bonds etc.(due to fixed interest rate)

Gains from inflation :

Debtors
Wage earners (only those wage earners gain whose wages adjust according to price rise.)
Share holders or stocks holder
Businessmen
Farmers gain due to increasing prices

*hope the answer will help you. please give feedback thank you

Rahul Sunny answered 1 year ago

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