If inflation is high, why may an increase in nominal wages not mean an increase in real wages?
Answer and explanation
Correct answer: Because a rise in prices can reduce purchasing power
Nominal wage is the money amount paid to a worker, whereas real wage measures the goods and services that the wage can buy. If nominal wages rise by 5% but the general price level rises by 8%, purchasing power falls and real wages decline approximately by 3%. Inflation therefore matters when judging living standards.
Frequently asked questions
What is the correct answer to this question?
Because a rise in prices can reduce purchasing power
Why is this the correct answer?
Nominal wage is the money amount paid to a worker, whereas real wage measures the goods and services that the wage can buy. If nominal wages rise by 5% but the general price level rises by 8%, purchasing power falls and real wages decline approximately by 3%. Inflation therefore matters when judging living standards.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
