Question

Since nominal wages fell by the same percentage as the price level, you explain that a decrease in the price level leads to ______ in real wages.

1) an increase
2) a decrease
3) no change
4) cannot be determined

Answer 1

A decrease in the price level leads to an increase in real wages.

Step-by-step explanation:

A decrease in the price level leads to an increase in real wages. When the price level decreases, the purchasing power of nominal wages (or the amount of goods and services that can be bought with a specific amount of money) increases. This means that workers can afford to buy more with their wages, effectively increasing their real wages. For example, if nominal wages decrease by 5% and the price level also decreases by 5%, workers can still buy the same amount of goods and services as before, so their real wages remain the same.