If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005.
A) increased 20%
B) remained the same
C) decreased
D) increased 10%

Question

Quizplus · Accepted Answer

To calculate the real wage rate, we need to adjust the nominal wage rate for inflation. Using the CPI, we can calculate the inflation rate from 2005 to today as (120-100)/100 = 0.2 or 20%. To find the real wage rate today, we need to adjust the nominal wage rate of $11-an-hour by the inflation rate of 20%. If we multiply $11 by (1-0.2), we get a real wage rate of $8.80-an-hour in terms of 2005 dollars. This is less than the nominal wage rate of $10-an-hour in 2005, so the real wage rate has decreased since 2005. Therefore, the answer is C, decreased.

If You Earned $10-An-Hour in 2005 When the CPI Was