If inflation is 0% and a firm wants to raise real wages by 1%, it will need to:
A)raise nominal wages by 1%.
B)lower nominal wages by 1%.
C)lower real wages by 2%.
D)raise inflation by 2%.

Question

Quizplus · Accepted Answer

If inflation is 0% and the firm wants to raise real wages by 1%, it needs to increase nominal wages by the same amount. Real wages are calculated by adjusting nominal wages for inflation, so if there is no inflation, there is no need to adjust nominal wages by a larger amount. Thus, the firm should raise nominal wages by 1% to achieve a 1% increase in real wages.

If Inflation Is 0% and a Firm Wants to Raise