Final answer:
An increase in the price levels while incomes remain constant leads to a decrease in real income due to the erosion of purchasing power from inflation.
Step-by-step explanation:
When the price level increases while incomes remain constant, the correct answer is b - real income decreases. This situation aligns with the wealth effect, a phenomenon where an increase in the price level erodes the purchasing power of savings and financial assets due to inflation. As the real value of people's wealth diminishes, their actual purchasing capacity decreases, making them relatively less wealthy.
Furthermore, if inflation rises but the interest rates on savings do not keep pace and remain lower than the inflation rate, the real rate of return on savings becomes negative. This results in a decrease in real income for individuals who rely on savings as part of their income, contributing to the overall decline in their real purchasing power.