If the price level rises by 4 percent in a year and nominal wages increase by 2 percent, then real wages will
A) decrease by 6 percent.
B) decrease by 4 percent.
C) decrease by 2 percent.
D) increase by 2 percent.

Question

Quizplus · Accepted Answer

Real wages are calculated by dividing nominal wages by the price level. If the price level rises by 4 percent and nominal wages increase by 2 percent, then the increase in nominal wages is not enough to keep up with the increase in prices, resulting in a decrease in real wages. The percentage decrease in real wages would be 2 percent (4 percent inflation minus 2 percent nominal wage increase). Therefore, choice C is the correct answer.

If the Price Level Rises by 4 Percent in a Year