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True or False:  If the output prices rise without the nominal wage rising, then the...

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lilylee | Student, College Freshman | Salutatorian

Posted June 25, 2013 at 10:42 PM via web

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True or False:  If the output prices rise without the nominal wage rising, then the real wages rise and workers are willing to work more. This is one of the main reasons that the short-run aggregate supply curve slopes upward.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 25, 2013 at 10:56 PM (Answer #1)

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This statement is not correct.  In fact, it has things backward.  It says that real wages will rise in this situation.  In fact, real wages will fall in this situation.  Therefore, the statement cannot be true.

In this statement, we are assuming that the price of outputs is rising.  If the price of outputs in general rises, then the prices that people will have to pay for all the things that they buy will rise as well.  So now think about what happens if nominal wages do not rise.  What that means is that the price of the average good or service that a person has to buy is rising, but the average worker’s wages are not rising.  This clearly does not mean that the person’s real wages are rising.  In fact, it means that they are falling.  With prices going up and workers receiving the same (nominal) wages, their buying power (real wages) actually declines.  They get the same amount of pay, but their pay does not buy as much as it used to.

When output prices rise and nominal wages stay the same, real wages actually fall.  Therefore, this statement is false.

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