Julia’s publisher sends her a $15,000 check every year that her book is in print

Question

Julia’s publisher sends her a $15,000 check every year that her book is in print. Suppose Julia’s book is in print for five years and the inflation rate during that period is (-2) percent.

A. How does the inflation rate above affect her nominal income from the book sales? Explain in 1-2 sentences, demonstrating you understand the term “nominal income.”

B. How does the inflation rate above affect Julia’s real income from the book? Explain in 2-4 sentences, demonstrating you understand the term “real income.” Note: there’s not enough information to calculate precise changes; just discuss in terms of directions.

Explanation / Answer

A.
Inflation rate is negative and it means that prices will come down. It will negatively affect the nominal income as it is calculated on the basis of current prices.
Nominal income is the income that is calculated on the basis of sales at current prices. For example, the number of books sold is 10 and current price is $10 per book.
Then, nominal income = No of books sold*current price = 10*10 = $100

B.
Inflation rate is negative. Thus, it will increase the real income due to increase in purchasing power. It can be understood by the fact that negative inflation will cause a reduction in prices of goods and services. Thus, with the same amount of income, more goods and services are purchased.
Real income means the income that is already adjusted the impact of inflation. It can be achieved by deduction of the inflation impact from the nominal income. Since inflation is negative, it will add on to nominal income and real income will increase.

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