An increase in nominal income without increase in price will result to

Analyze the question

The question asks what happens when nominal income rises while the price level stays the same.

Explain the concept

• Nominal income is income measured in current money terms (the naira you actually receive).
• Real income is income adjusted for price changes, which shows what your money can actually buy.

Formula:

Real income = (Nominal income ÷ Price index) × 100

Step-by-step solution

1. Suppose nominal income rises from ₦50,000 to ₦60,000.
2. The price level is unchanged, so the price index stays at 100.
3. Real income before = (50,000 ÷ 100) × 100 = ₦50,000
4. Real income after = (60,000 ÷ 100) × 100 = ₦60,000
5. Real income has gone up, so purchasing power has increased.

Checking the options

• A. Increased real income: Correct. Prices are constant, so the higher nominal income buys more goods and services.
• B. Increased GDP: Not necessarily. GDP measures the total output of the economy. A rise in one person's or group's nominal income does not automatically mean output has increased.
• C. Decreased real income: Wrong. This would happen if prices rose faster than nominal income.
• D. Decreased GNP: Wrong. There is no reason for GNP to fall.

**Answer: A.

Exam tip

Compare nominal income with the price level:

• Nominal income up, prices constant → real income up
• Nominal income up, prices up faster → real income down
• Nominal income constant, prices up → real income down

Real income is about purchasing power, not the number of naira in your hand.