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Future CPA
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Posted: 04 Jul 2009 at 12:17 | IP Logged  

Becker Question CPA-03304

A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:

a.    An increase in real GDP and a decrease in the price level.
b.    A decrease in real GDP and an increase in the price level.
c.    A decrease in real GDP and a decrease in the price level.
d.    An increase in real GDP and an increase in the price level.

My answer: D. Correct answer: B.

I chose D because...If the nominal wages rise, that means the working class is getting more money.

More money = Increase in wealth = Increase in demand = Increase in GDP = Increase in price level.

But Becker explains that there is a decrease in GDP and an increase in price level.

Can someone please explain where I went wrong...


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jay_usa
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Posted: 04 Jul 2009 at 12:43 | IP Logged  

Increase in wages means now companies will have to pay more for the labor ( input price ). This will discourage them to produce more, inturn, the supply will be less and they will charge more prices. In Other words, GDP will fall and price level will increase.

Refer to Becker Book Page B2-12( Increase in Input Prices ). If this was Increase in Income,then your line of thought was correct, then increase in demand and decrease price level.. However, Increase in Wages will be considered Increase in Input prices ( Labor, Material ) etc.

Hope this helps.






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Future CPA
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Posted: 04 Jul 2009 at 14:05 | IP Logged  

Thanks jay for clarifying the concept! The answer makes much more sense to me now than it did before. Thanks!

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Dparkx81
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Posted: 04 Jul 2009 at 18:14 | IP Logged  

Hi Future CPA - This might also clear it up. Jay's response was perfect but an increase in nominal wages which increase in price level means that purchasing power difference should be constant. Therefore demand will not increase.

I just wrote this because you linked nominal wages with an increase in demand. Jay's explanation of the supply side was perfect but I wanted to also point that out.


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Future CPA
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Posted: 05 Jul 2009 at 08:48 | IP Logged  

Dparkx81, point noted! I didn't even link the two of them together. I'm glad you brought this up. So increase in nominal wages is an increase in price, which of couse does not result in increased demand. Thanks!

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