In this scenario, you bought shares of stock, and over the next year, both the stock price and the price level increased by 5 percent.
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Nominal Gain: This is the increase in the stock price before adjusting for inflation. Since the price of the stock increased by 5%, you have a nominal gain of 5%.
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Real Gain: This considers the inflation effect. Since the overall price level also increased by 5%, your purchasing power didn't actually increase. Therefore, there is no real gain. The nominal gain was exactly offset by the inflation.
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Tax Implications: Typically, taxes are assessed on the nominal gains, not real gains. Since you have a nominal gain, you would be taxed accordingly.
Given this analysis, the correct answer is:
b. a nominal gain, but no real gain, and you paid taxes on the nominal gain.