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

Here we evaluate the statement about nominal wages, price level, and real wages. 
Option 1 (True): The claim would assert that real wages rise when nominal wages increase more slowly than prices. This misstates the relationship, because real wages depend on the ratio of wages to prices, not on wages alone. If prices outpace wage growth, purchasing power declines, not rises, so this option is incorrect.
Option 2 (False): When nominal wages grow more slowly than the price level, the real wage (wages adjusted for inflation) falls. Since real wages = nominal wages minus inflation in effect, or more precisely W/P, a slower wage rise relative to prices reduces W/P, meaning purchasing power of income decreases. Therefore, the statement that purchasing power has risen is false, given the slower wage growth compared with inflation.
In summary, slower wage growth than the rise in prices reduces, rather than increases, real wages and purchasing power. The correct interpretation is that real wages fall in this scenario, so the assertion in the question is incorrect.

MCD2090 Macroeconomics - Trimester 2 - 2025

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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