Why is the axis on labor market REAL wage instead of nominal? A) households care about money. B) households care about leisure. C) households care about purchasing power. D) Households care about flexibility.
The correct answer and explanation is:
The correct answer is C) Households care about purchasing power.
Real wages are used on the labor market axis because they reflect the actual purchasing power of the income earned by households. The nominal wage refers to the amount of money received for work, but it does not account for changes in the price level or inflation. On the other hand, real wages adjust for inflation and show how much goods and services can be purchased with the income earned. This makes real wages a more meaningful measure for households when evaluating their economic well-being.
Households care about what their income can buy, not just how much money they earn. For example, if wages increase but prices also rise at the same rate, the purchasing power remains unchanged. Therefore, households focus on real wages because they better represent their standard of living. When real wages increase, it means that households can afford more goods and services, which improves their economic situation.
Nominal wages alone may not accurately reflect changes in the cost of living, as they do not account for inflation. Thus, policymakers, economists, and households themselves often focus on real wages to understand trends in economic prosperity. By looking at real wages, households can make better decisions about work, consumption, and savings, as they are directly concerned with how far their earnings can go in terms of purchasing necessary goods and services.