If the price level rises by 5 percent and the nominal wage rises 3 percent,the real wage
A)falls by 2 percent
B)falls by 8 percent
C)rises by 2 percent
D)rises by 8 percent
E)remains constant

Question

Quizplus · Accepted Answer

Real wage is equal to nominal wage divided by price level. 
If price level rises by 5%, then the real wage is: 
Real wage = Nominal wage / (1.05) 
If nominal wage rises by 3%, then the real wage is: 
Real wage = 1.03 x Nominal wage / (1.05) = 0.981 x Nominal wage 
Therefore, the real wage falls by 1 - 0.981 = 0.019 or 1.9%, which is roughly 2%, option A.

If the Price Level Rises by 5 Percent and the Nominal