Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn $35,000/year in your first job in 2018. You know that average prices have risen steadily since 1961. You earn A. less than 5 times as much as your grandfather in terms of real income. B. more than 5 times as much as your grandfather in terms of real income. C. less than 5 times as much as your grandfather in terms of nominal income. D. 5 times as much as your grandfather in terms of real income.

A. less than 5 times as much as your grandfather in terms of real income.

Explanation:

Nominal income is earning that does not take account of changes in price levels. Nominal income is the stated income. Real income considers the changes in inflation. Therefore, real income is nominal income after considering inflation effects.

If grandfather earned  $7000 per year in 1961, and myself $35,000 in 2018,  mathematically i earned five times more than him. The five times ($35,000/$7,000) is the stated amount without factoring in inflation. The difference between $35,000 and $7000 is the nominal difference because it is not adjusted for inflation. In we consider inflation, the real income is less than five times.

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