Question

If the real wage rate increases over time, this means that the

A) nominal wage rate Has increased over time

B) buying power of an hours work has increased over time

C) the CPI must have decreased over time

D) inflation rate has increased over time

E) Quantity of labor has increased over time

Answer 1

Real wage = Nominal wage / Inflation rate

- An increase in real wage can possibly be because of an increase in nominal wage or a decrease in the inflation rate, vice versa. Thus, the increase cannot be in response to a change in one factor only. (Option A and D wrong)

- A decrease in CPI means deflation in the economy which is one of the factors affecting real wage. It is not a necessary case, the real wage increase could be because of an increase in nominal wage with no change in inflation. (Option C wrong)

- An increase in quantity of labour implies excess supply of labour. This makes the nominal wages to decline, that is, a fall in real wage rate. (Option E wrong)

- However, one result does not change with an increase in real wage, this increase implies an increase in purchasing power of the worker. An extra working hour now expends an increased ability to buy more goods. It doesn't matter if the increase is due to an increase in nominal wage or a fall in price level, the purchasing power rises as a whole when real wage increases.

Thus, the correct answer is option B) buying power of an hours work has increased over time.