Question

A decrease in the real wage rate decreases consumption and has an ambiguous effect on labor supply. has an ambiguous effect on both consumption and labor supply. decreases consumption and decreases labor supply for sure. decreases consumption and increases labor supply.

Answer 1

Answer:

The answer is: decreases consumption and has an ambiguous effect on labor supply.

Explanation:

Real wage are nominal wages adjusted to inflation. For example if your salary is $50,000 a year, the inflation rate is 3%, and you only get a 2% raise; your real wage will have decreased by 1%. This means that the prices of goods and services has increased more than your salary.

When the real wage decreases, the purchasing power of individuals will decrease, lowering consumption levels.

The effects on labor supply vary depending on other economic factors. For example if the costs of materials increase, then a company might try to spend less in labor costs. Other factors like technological improvements on machinery, taxes, etc. affect the labor supply more than real wages.