Suppose nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year.How will real wages be affected?

Question

Quizplus · Accepted Answer

Real wages are calculated as the ratio of nominal wages to price level. In this case, nominal wages are increasing at a rate of 2 percent per year, but the price level is increasing at a faster rate of 5 percent per year. As a result, the purchasing power of nominal wages decreases, leading to a decrease in real wages. The percentage decrease in real wages is the difference between the percentage increase in nominal wages and the percentage increase in price level, which is 2 percent minus 5 percent, or 3 percent per year.

Suppose Nominal Wage Rates Increase by 2 Percent Per Year