National income can be either nominal or real. Assuming other factors remain constant, what does a rise in real national income generally indicate?

It rises as it shows the increase in output level 

The correct answer is Option 2: It rises as it shows the increase in output level

Real national income is a true indicator of the health of economy, as it nullifies the affect caused due to rise in price of the commodities. Real national income is measured on constant prices to get a clear picture of the increased output.

A rise in real national income, by definition, indicates an increase in the actual volume of goods and services produced in an economy. When output increases, and assuming other factors remain constant—such as no worsening of income distribution, no rise in negative externalities, and no exclusion of significant non-monetary activities—the overall availability of goods and services for consumption and productive use also rises. This generally results in an improvement in the material well-being, or welfare, of the population. Now, national income is the income earned by all the people in the country. If it rises, it can be concluded that there will be rise in welfare as well.