Recently, a teachers' union argued that the standard of living of teachers working for the school district was falling. The negotiating team for the school board replied that this was not true because
The teachers had received signiﬁcant increases in nominal income through collective bargaining.
Could the union statement be correct?
A) No, because real income may rise if price increases are proportionately greater than the increases in nominal income.
B) Yes, because real income may fall if price increases are proportionately smaller than the increases in nominal income.
C) Yes, because real income may fall if price increases are proportionately greater than the increases in nominal income.
D) No, because real income may rise if price increases are proportionately greater than declines in nominal income.

Question

Quizplus · Accepted Answer

The union statement could be correct because real income can fall if price increases are proportionately greater than the increases in nominal income. Nominal income refers to the actual amount of money earned, while real income takes into account the effects of inflation on purchasing power. If prices increase at a faster rate than salaries, the real value of income decreases, even though the nominal income may have increased. Therefore, the union's claim about falling standards of living may be accurate even if nominal income has risen through collective bargaining.

Recently, a Teachers' Union Argued That the Standard of Living