If nominal wages rise faster than the price level, then real wages have ________ and the purchasing power of income has ________. a. fallen; risen b. fallen; fallen c. risen; fallen d. risen; risen
Question
If nominal wages rise faster than the price level, then real wages have ________ and the purchasing power of income has ________.
a. fallen; risen
b. fallen; fallen
c. risen; fallen
d. risen; risen
Solution
The correct answer is:
d. risen; risen
Real wages are nominal wages adjusted for changes in the price level (inflation). If nominal wages are rising faster than the price level, then real wages are increasing. This means that workers are earning more in terms of the goods and services they can buy with their wages.
The purchasing power of income refers to the amount of goods and services that can be bought with a unit of income. If real wages are rising, then the purchasing power of income is also rising, because each unit of income can buy more goods and services.
Options a, b, and c are incorrect because they suggest that either real wages or the purchasing power of income has fallen, which is not the case if nominal wages are rising faster than the price level.
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