Suppose inflation is expected to be 5 percent next year, and you and your employer agree to a 6 percent increase in your nominal, or monetary, wage. If inflation turns out to be 5%, what is your nominal wage increase?
A) 1 percent
B) minus 1 percent
C) 0 percent
D) minus 5 percent
E) 6 percent

Question

Quizplus · Accepted Answer

If inflation turns out to be 5%, then your real wage increase (the increase in purchasing power) is 1% (6%-5%). However, the question specifically asks for your nominal wage increase, which is the increase in dollars that you will receive. Therefore, your nominal wage increase is still 6%.

Suppose Inflation Is Expected to Be 5 Percent Next Year