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.

Question

Quizplus · Accepted Answer

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.

Suppose the Real Wage of a Worker Remains Unchanged Between