Which of the following characterizes the relationship between wages and inflation?

Question

Quizplus · Accepted Answer

Inflation affects both nominal and real wages. Real wages are the purchasing power of nominal wages, so if inflation causes prices to increase, then real wages will decrease unless nominal wages also increase. Therefore, real wages will change if nominal wages are constant during periods of inflation. Option A is incorrect because nominal wages may increase during periods of low inflation, which would lead to an increase in real wages. Option B is incorrect because during periods of high inflation, nominal wages tend to increase at a slower rate than prices, leading to a decrease in real wages. Option D is incorrect because even during periods with a constant inflation rate, real wages will change if nominal wages do not keep up with inflation.

Which of the Following Characterizes the Relationship Between Wages and Inflation