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 real wage increase?
A) 1 percent
B) minus 1 percent
C) 0 percent
D) minus 5 percent
E) 6 percent

Question

Quizplus · Accepted Answer

The real wage increase is calculated by subtracting the inflation rate from the nominal wage increase. Therefore, a 6 percent nominal increase minus 5 percent inflation equals a 1 percent real wage increase.

Suppose Inflation Is Expected to Be 5 Percent Next Year