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 6%, 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

Your real wage increase is 0 percent because the increase in your nominal wage (6 percent) is exactly offset by the inflation rate (6 percent), leaving no change in your purchasing power.

Suppose Inflation Is Expected to Be 5 Percent Next Year