Jim is negotiating a contract for a labor union.The union wants to increase members' real wages by 4 percent.The inflation rate is predicted to be 7 percent.To attain the union's goal,Jim needs to negotiate a raise in the nominal
A) wage of 4 percent
B) wage of 7 percent
C) wage of 11 percent
D) rate of 3 percent
E) rate of 28 percent

Question

Quizplus · Accepted Answer

To increase members' real wages by 4 percent means to increase their wages by the inflation rate plus the desired increase in wages, which is:

(1 + inflation rate) x (1 + desired increase) = 1 + real wage increase

Plugging in the given values, we get:

(1 + 0.07) x (1 + 0.04) = 1 + 0.11

This means that to achieve the union's goal of a 4 percent increase in real wages, Jim needs to negotiate a raise in the nominal wage of 11 percent (Choice C).

Jim Is Negotiating a Contract for a Labor Union