An assistant professor of economics gets a $100-a-month raise, but then she figures that with her current monthly salary she can't buy as many goods as she could last year. Which of the following has happened to her real and nominal wage?

Question

Quizplus · Accepted Answer

A situation where the nominal wage increases but the real wage falls can be explained by inflation. If the assistant professor's nominal wage increased by $100, but inflation caused the cost of goods and services to rise by more than $100, then her purchasing power would have decreased, resulting in a lower real wage. Therefore, her real wage has fallen while the nominal wage has risen.

An Assistant Professor of Economics Gets a $100-A-Month Raise, but Then