If prices rise and wages do not, what happens to real income?

• A. Real income rises.
• B. Real income stays the same.
• C. Real income falls.
• D. Real income doubles.

Answer: (C)

When prices rise while wages stay the same, your purchasing power drops. Real income reflects how much you can actually buy with your earnings, not just the dollar amount you earn. If your wages don’t increase but the price level goes up, the same paycheck buys fewer goods and services, so real income falls.

So it wouldn’t rise or stay the same, because higher prices without higher wages reduce what your money can buy. It also wouldn’t double—inflation doesn’t magically increase your purchasing power; it erodes it unless wages rise.