Suppose that the average level of prices in the economy fell 4% and workers' wages were cut by 2%. Which of the following statement(s) is (are) TRUE?
I. Real wages of workers increased.
II. The nominal wages of workers were cut.
III. Workers who were loss averse felt worse off.
A) I
B) II and III
C) I, II, and III
D) II

Question

Quizplus · Accepted Answer

Real wages increased because the decrease in prices (4%) was greater than the cut in nominal wages (2%), meaning workers' purchasing power actually increased. Nominal wages were indeed cut, as stated. Workers who are loss averse would feel worse off due to the nominal wage cut, despite the increase in real wages, because loss aversion emphasizes the psychological impact of losses over gains.

Suppose That the Average Level of Prices in the Economy