Real wages would rise if the
A) prices of goods and services rose more rapidly than nominal-wage rates.
B) prices of goods and services rose less rapidly than nominal-wage rates.
C) prices of goods and services and wage rates both rose.
D) prices of goods and services and wage rates both fell.

Question

Quizplus · Accepted Answer

Real wages are calculated by adjusting nominal wages for inflation. If prices of goods and services rise less rapidly than nominal wages, then the purchasing power of workers increases and their real wages rise. For example, if nominal wages increase by 3% but inflation only increases by 2%, then real wages increase by 1%. Conversely, if prices rise more rapidly than nominal wages, then the purchasing power of workers decreases and their real wages fall. Choice A would lead to a decrease in real wages, while choices C and D would have ambiguous effects on real wages depending on the relative magnitudes of price changes and wage changes.

Real Wages Would Rise If the