Suppose workers receive a 5 percent increase in wages and prices are rising by 5 percent. Workers will experience
A) an increase in nominal wages and a decrease in real wages.
B) an increase in nominal wages and an increase in real wages.
C) an increase in nominal wages but real wages are unchanged.
D) a decrease in nominal wages and a decrease in real wages.

Question

Quizplus · Accepted Answer

The workers' nominal wages will increase by 5 percent due to the wage increase, but their real wages will remain unchanged because the increase in prices has offset the wage increase. Real wages measure the purchasing power of nominal wages, which can be calculated as the nominal wage divided by the price level. In this case, the increase in nominal wages is cancelled out by the increase in prices, so real wages are unchanged.

Suppose Workers Receive a 5 Percent Increase in Wages and Prices