Asked by Sierra Summers on Jul 04, 2024
Verified
Assume that your nominal wage was fixed at $15 an hour, and the price index rose from 100 to 105. In this case, your real wage has
A) decreased to $10.
B) increased to $15.75.
C) decreased to $14.29.
D) increased to $20.
Nominal Wage
The amount of money paid to an employee before adjustments for inflation, often expressed as an hourly or annual figure.
Price Index
A measure that examines the weighted average of prices of a basket of consumer goods and services over time.
Real Wage
Adjusted for inflation, it represents the purchasing power of the wage rate.
- Explore the effect that changes in the price level have on wage purchasing power.
Verified Answer
MR
Madhav RawatJul 11, 2024
Final Answer :
C
Explanation :
When the price index rises from 100 to 105, it indicates inflation or an increase in the general price level by 5%. If your nominal wage remains the same ($15/hour), your purchasing power decreases. To find the real wage, you adjust the nominal wage by the change in price level. The real wage is calculated as $15 / (105/100) = $14.29. This shows a decrease in real wage, reflecting the reduced purchasing power due to inflation.
Learning Objectives
- Explore the effect that changes in the price level have on wage purchasing power.