How is the price level related to real income?
Question: This is a question for my econ mid-term practice exam. If price level rises faster than your money income, then your real income: Increases, decreases, remains the same, or fluctuates. Answer: It would be wrong for me to answer an exam question for you, but let’s think it through. Suppose that your income is $5 a week and that the economy’s only consumer good is loaves of bread, which cost $1 each. Then you can buy five loaves of bread with your weekly income. Now, suppose that the price of a loaf of bread goes up to $2.50, but you still earn $5 a week. Your weekly income can now buy only two loaves of bread, whereas before, it could buy five loaves of bread. I leave it to you to figure out if that’s an increase or a decrease in your real income.
