If you earned 40000 this past year the rate of inflation inc

If you earned $40,000 this past year, the rate of inflation increased 2%, and you did not get a pay raise this year, what happened to your buying power/standard of living? Did it increase or decrease and if so, by how much?

Solution

as your income has not increased but rate of inflation has increased by 2% , your buying power / standard of living must have reduced. because due to high prices , you will be able to purchase less.

change in real income= change in nominal income - change in inflation rate = 0%- 2% =-2%

so real income or purchasing power or standard of living will decrease by 2%