Your employer offers you a salary raise of 2%, You read in the news that inflation next year is expected to be 5%. After learning the principles of macroeconomics, you will be

Question

Group of answer choices

concerned because your real income will be same.

happy that your real income will decrease.

concerned that your real income will decrease.

happy that your real income will increase.

Answer 1

In this scenario, if your salary is raised by 2% and inflation is expected to be 5%, you would be concerned that your real income will decrease. Real income takes into account the effects of inflation on purchasing power.

To calculate the real income change, you can subtract the inflation rate from the salary raise percentage:

\[ \text{Real income change} = \text{Salary raise} - \text{Inflation rate} = 2% - 5% = -3% \]

This indicates that, in real terms, your purchasing power will decrease by 3%.

Therefore, the correct choice is:

concerned that your real income will decrease.