Chapter 14, Problem 7MCQ

To determine

The question requires us to determine the situation the economy has experienced due to changes in real wages and nominal wages.

Explanation of Solution

A real wage is an inflation-adjusted wage while a nominal wage doesn’t consider inflation.

The following expression represents the relationship between inflation, real wage, and nominal wage:

  $\text{Real wage = }\frac{\text{Nominal wage}}{\text{Price}}$

If the nominal wage remains the same and the real wage decreases, then the price must be rising and an increase in prices of goods and services reflects inflation in the market.

Therefore, when the real wage falls while the nominal wage remains the same then the economy must have faced inflation.

Option “a” is correct.

Other options are incorrect because:

b) Deflation causes the general price level to fall in the market, and a lower price indicates a higher real wage.

c) The process of slowing down the rate of inflation is termed disinflation in a market.

d) Zero inflation means there is no change in the prices of goods and services. Zero inflation doesn’t impact the real wage.

e) Unemployment doesn’t impact the real wage directly.