Asked by Megan McDermott on Jul 15, 2024
Verified
Suppose the real wage of a worker remains unchanged between Year 1 and Year 2 but the nominal wage decreases from $20 in Year 1 to $18 in Year 2.This implies that the price level has:
A) increased by 20 percent.
B) increased by 25 percent.
C) remained unchanged.
D) fallen by 10 percent.
E) fallen by 20 percent.
Nominal Wage
The wage or salary paid to labor in current dollars, unadjusted for inflation, representing the face value of earned income.
Price Level
Refers to the average of all current prices for goods and services in an economy.
Real Wage
The purchasing power of wages, defined by how much goods and services the wages can buy, adjusting for the level of prices in an economy.
- Gain an understanding of the association between nominal wages, real wages, and the price level.
- Learn the effects that transformations in price levels exert on real wages and the job market.
Verified Answer
TC
tamera cooperJul 18, 2024
Final Answer :
D
Explanation :
Since the real wage remains unchanged, we can infer that the decrease in nominal wage was exactly offset by a decrease in the price level. Using the formula for the real wage, real wage = nominal wage / price level, we can solve for the percentage change in price level:
1. Real wage in Year 1 = $20 / P1
2. Real wage in Year 2 = $18 / P2
3. Since the real wage is constant, we can set equation 1 equal to equation 2:
$20 / P1 = $18 / P2
4. Solving for P2, we get P2 = (9/10) * P1
5. Thus, the percentage change in price level is (P2 - P1) / P1 * 100% = -10%
Therefore, the answer is D: fallen by 10 percent.
1. Real wage in Year 1 = $20 / P1
2. Real wage in Year 2 = $18 / P2
3. Since the real wage is constant, we can set equation 1 equal to equation 2:
$20 / P1 = $18 / P2
4. Solving for P2, we get P2 = (9/10) * P1
5. Thus, the percentage change in price level is (P2 - P1) / P1 * 100% = -10%
Therefore, the answer is D: fallen by 10 percent.
Learning Objectives
- Gain an understanding of the association between nominal wages, real wages, and the price level.
- Learn the effects that transformations in price levels exert on real wages and the job market.