If the nominal wage rises from €10 per hour in period one to €15 per hour in period 2 as the expected price level rises from 1 to 3 while the actual price level rises from 4 to 5, then from period 1 to period 2:
A)the nominal wage is falling.
B)the expected real wage is rising.
C)the actual real wage is rising.
D)all of the above.

Question

Quizplus · Accepted Answer

The actual real wage is calculated by dividing the nominal wage by the actual price level, so in period one the actual real wage is €2.50 per hour and in period two it is €3 per hour. Therefore, the actual real wage is rising. The expected real wage is calculated by dividing the nominal wage by the expected price level, so in period one the expected real wage is €10 per hour, but in period two it is €5 per hour. Therefore, the expected real wage is falling. While the nominal wage is rising, this is not relevant to the question as it is not asking about changes in the nominal wage itself.

If the Nominal Wage Rises from €10 Per Hour in Period