Suppose there is a 5 percent increase in the nominal wages of workers in an economy. The annual rate of inflation in the economy is about 2 percent. Which of the following is true?
A) Real wages would fall by about 10 percent.
B) Real wages would increase by about 20 percent.
C) Real wages would fall by about 25 percent.
D) Real wages would increase by about 50 percent.
E) Real wages would increase by about 3 percent.

Question

Quizplus · Accepted Answer

Real wages can be calculated as nominal wages adjusted for inflation. In this case, we would calculate real wages as follows:

Real wages = Nominal wages / (1 + inflation rate)
Real wages = Nominal wages / (1 + 0.02)   (since the inflation rate is 2%)
Real wages = 1.05 / 1.02 * 100
Real wages = 1.0294 * 100
Real wages = 102.94

Therefore, real wages would increase by about 3 percent (option E).

Suppose There Is a 5 Percent Increase in the Nominal