Which statement best explains why real wages might grow even if nominal wages rise by the same amount?

Which statement best explains why real wages might grow even if nominal wages rise by the same amount?

• A. Real wages rise if prices fall across the economy
• B. Real wages rise when the cost of living decreases
• C. Real wages rise if the increase in nominal wages outpaces inflation
• D. Real wages are unaffected by wage changes

Answer: (C)

Real wages measure how much your income can buy after adjusting for changes in prices. If prices (inflation) rise, your nominal pay might go up too, but real wages grow only when the pay rise is faster than the price rise. When nominal wages outpace inflation, you can buy more with your income, so real wages increase. For example, wages rise 6% while prices rise 4%—real wages rise about 2%. If prices rise as fast as wages, real wages stay the same; if prices rise faster, real wages fall. So the statement that real wages rise when the increase in nominal wages outpaces inflation best captures why purchasing power can grow even with wage increases.

Real wages measure how much your income can buy after adjusting for changes in prices. If prices (inflation) rise, your nominal pay might go up too, but real wages grow only when the pay rise is faster than the price rise. When nominal wages outpace inflation, you can buy more with your income, so real wages increase. For example, wages rise 6% while prices rise 4%—real wages rise about 2%. If prices rise as fast as wages, real wages stay the same; if prices rise faster, real wages fall. So the statement that real wages rise when the increase in nominal wages outpaces inflation best captures why purchasing power can grow even with wage increases.