Difficulty: Easy

Average Score: 100%

Wages have increased less than the rate of inflation. What will happen to the purchasing power of individuals under these conditions

Rationale

They will lose purchasing power.

When wages increase at a rate slower than inflation, individuals can buy fewer goods and services with their income, leading to a decrease in their overall purchasing power. This means that even if they are earning money, it does not go as far as it used to due to rising prices.

A (Their purchasing power will be ambiguous.) YOUR ANSWER

This option suggests uncertainty regarding purchasing power, but economic principles clearly indicate that if wages do not keep pace with inflation, purchasing power will decline. Therefore, it is not ambiguous; it is definitively diminishing.

B (Their purchasing power will remain constant.) YOUR ANSWER

If wages stay the same while inflation rises, purchasing power cannot remain constant. In fact, it decreases because the cost of living increases, meaning that the same amount of money buys less than before.

C (They will gain purchasing power.) CORRECT

This choice is incorrect because gaining purchasing power implies that individuals can afford more than before. However, if wages have increased less than inflation, individuals are actually able to purchase fewer goods, which does not support a gain in purchasing power.

D (They will lose purchasing power.) YOUR ANSWER

This statement accurately reflects the situation described. As wages fail to keep up with inflation, individuals will indeed lose purchasing power, meaning their ability to buy goods and services diminishes over time.

Conclusion

In summary, when wages increase less than the rate of inflation, individuals experience a decrease in purchasing power. This is due to the fact that rising prices erode the value of their earnings, leading to a situation where they cannot afford the same quantity of goods as before. Thus, the correct conclusion is that individuals will lose purchasing power under these economic conditions.

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