A worker currently earning $3000 per month has negotiated a 4% wage increase in anticipation of a 4% inflation rate in the next year.Under what scenario will the worker have a higher purchasing power?
A)if next year's inflation rate is 4%
B)if next year's inflation rate is 3%
C)if next year's inflation rate is 5%
D)if next year some prices increase by only 4%
E)if next year some prices increase by only 5%

Question

Quizplus · Accepted Answer

If the inflation rate is only 3%, then the worker's 4% wage increase will result in a real (inflation-adjusted) wage increase of 1%. If the inflation rate is higher than 4%, then the purchasing power of the worker's wages will decrease. Therefore, option B is the best choice as it allows the worker to maintain or increase their purchasing power.

A Worker Currently Earning $3000 Per Month Has Negotiated a 4