If your income climbs from Rs19,000 to Rs31,000 while the Consumer Price Index moves from 122 to 169, how has your standard of living likely changed?
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Answer: C. risen
Explanation
Real income adjusts nominal earnings for changes in price levels. Nominal income growth outpaced the percentage increase in the price index. Higher real purchasing power indicates an improved standard of living. Real income equals nominal income divided by the Consumer Price Index. The Consumer Price Index measures the cost of a standard consumption basket. Standard of living depends on the quantity of goods money can buy.
Economic well-being is best measured using inflation-adjusted real metrics. Wage negotiations focus on real purchasing power rather than nominal pay. Cost-of-living adjustments protect workers from inflationary standards erosion. Fallen is incorrect because real purchasing power actually increased. Knowing the base year is unnecessary for calculating relative index changes. Staying the same ignores the positive net growth in real income.
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