In 2017 Sabrina earned an annual salary of $100,000 as an engineer. In 2018, her income rose to $105,000. The inflation rate in 2018 was 2%. How did Sabrina’s nominal income and real income change in 2018 compared to 2017?

Change in Nominal income = 5%

Change in real income = 2.9 %

Explanation:

Real income is the amount of basket of goods and services that can be actually purchased . It is the nominal income adjusted for inflation.

Real income = (CPi in base base year/ CPI current year) × Nominal income

Real income for Sabrina

= (100/102) × 105,000

= 102,941.1765

Change in real income = (102,941.1765 -100,000)/100,000

= 2.9 %

Change in Nominal income = (105,000-100,000)/100,000

= 5%