If the Consumer Price Index (CPI)increases from 100 to 200 and the nominal wage increases from $100 to $400,what is the change in the real wage in terms of the beginning year's dollars?
A) +$200
B) +$400
C) +$100
D) +$300
E) -$200

Question

Quizplus · Accepted Answer

The real wage is the nominal wage adjusted for changes in the price level, so we need to calculate the nominal wage adjusted for CPI changes. To do so, we divide the nominal wage by the CPI in each year and multiply by 100 to express it in terms of the beginning year's dollars.

Real wage in beginning year's dollars = (Nominal wage / CPI) x 100

Real wage in beginning year's dollars in the initial year = (100 / 100) x 100 = $100

Real wage in beginning year's dollars in the final year = (400 / 200) x 100 = $200

Change in the real wage in beginning year's dollars = $200 - $100 = $100, so the answer is C.