If nominal wages rise slower than the price level, then real wages have fallen, and the purchasing power of income has risen.

Question

BlackTom AI · Accepted Answer

Consider the relationship between nominal wages, the price level, and real wages. Real wages are roughly equal to nominal wages adjusted for inflation: real wage ≈ nominal wage / price level. If the price level rises faster than nominal wages, the numerator (nominal wages) increases more slowly than the denominator (price level), so the ratio falls. In other words, the purchasing power of income declines because each unit of nominal wage buys fewer goods and services.

Option 1: True. This option claims that when nominal wages rise more slowly than the price level, real wages fall and purchasing power rises. This misstates the effect: a slower wage growth relative to prices reduces real wages and buying power, not increases it. The logic contradicts the basic real wage calculation and the intuition that higher prices erode purchasing power unless wages keep up.

Option 2: False. This option asserts that the statement is incorrect. The core idea to evaluate is whether a slower rise in wages relative to prices leads to lower real wages. Since real wages depend on the ratio of wages to the price level, a slower wage growth in the face of rising prices indeed reduces real wages and purchasing power, making the statement inaccurate.

In summary, the key concept here is the real wage calculation: if price levels outpace wage growth, purchasing power declines. The first option misinterprets that effect, while the second option correctly identifies the flaw in the statement.

If nominal wages rise slower than the price level, then real wages have fallen, and the purchasing power of income has risen.

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