Question 12

Individuals will lose purchasing power.

When wages increase at a rate lower than inflation, individuals find that their earnings do not stretch as far as they did previously. This discrepancy leads to a decrease in the overall purchasing power of individuals, meaning they can buy less with the same amount of money.

A) Their purchasing power will be ambiguous.

This option is incorrect because the relationship between wage increases and inflation is clear. When wages do not keep pace with inflation, the purchasing power declines rather than being uncertain or ambiguous.

B) Their purchasing power will remain constant.

This choice is incorrect as well. If wages are not increasing at the same rate as inflation, then individuals cannot maintain their purchasing power; it will not stay the same but rather decrease.

C) They will gain purchasing power.

This option is incorrect because it contradicts the economic principle that states if wages increase less than inflation, purchasing power diminishes. Therefore, individuals will not gain purchasing power under these circumstances.

D) They will lose purchasing power.

This is the accurate statement reflecting the situation described. As inflation rises and wages do not keep up, individuals will experience a reduction in their ability to purchase goods and services, effectively losing purchasing power.

Conclusion

The correct answer is that individuals will lose purchasing power when wages do not increase at the same rate as inflation. This situation directly leads to a decrease in the ability to buy goods and services, as evidenced by the incorrectness of all other options which do not align with this economic reality. Understanding this relationship is crucial for evaluating the impact of economic changes on individual financial well-being.