If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage:

Question

BlackTom AI · Accepted Answer

Consider the relationship between nominal wage growth and inflation when evaluating real wages.
Option a: 'increased 4 percent.' If wages rose by 4% and inflation were 0%, real wages would rise by 4%. Here inflation is 6%, so a 4% nominal increase does not translate to a real gain of 4%; this option ignores the eroding effect of inflation.
Option b: 'increased 2 percent.' A rise of 2% in nominal wages, with 6% inflation, would yield a real wage change of 2% − 6% = −4%. This would imply a larger drop in real wages than indicated here, so this option miscalculates the impact by not aligning with the 4% wage increase.
Option c: 'decreased 2 percent.' The real wage change equals nominal wage growth minus inflation: 4% − 6% = −2%. A negative 2% real wage means purchasing power fell despite a higher nominal wage, which matches this option.
Option d: 'decreased 6 percent.' This would imply a real wage change of 4% − 6% − 0% or misapplying the formula; it incorrectly treats the outcome as a full 6% decrease rather than the correct 2 percentage-point gap between inflation and wage growth.
In summary, the key idea is real wages reflect the difference between what workers earn nominally and how much prices have risen; since prices rose by 6% and wages rose by 4%, real wages fell by 2%. The only option that expresses a −2% real change is option c, while the others misstate the relationship or arithmetic involved.

BU.220.610.51.FA25 M2 Practice Quiz

If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage:

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