A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?
A)$10.30
B)$10.70
C)$10.90
D)$11.02

Question

Quizplus · Accepted Answer

To find the indexed wage in year two, the wage that would maintain the purchasing power from the first year, take the nominal wage in year one and multiply it by the CPI:, $10 × 1.07 = $10.70. Then, since the contract calls for an increase in the real wage by 3 percent, the indexed wage must be increased by 3 percent: $10.70 × 1.03 = $11.02.

A Labor Contract Provides for a First-Year Wage of $10