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A family's monthly income rises by 5%, while the prices of the goods it normally buys rise by 10%. Assuming its buying pattern remains unchanged, which conclusion is most reasonable?

Answer and explanation

Correct answer: Its purchasing power decreases because prices rise faster than income

The family's nominal income increases, but the cost of its usual purchases rises by a greater percentage. The ratio of new income to new prices is 1.05 divided by 1.10, approximately 0.955, indicating a reduction in purchasing power of about 4.5%.

Related tags

Purchasing PowerInflationHousehold IncomeEconomic Reasoning

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