Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent. Should inflation actually be 6 percent, then:
A) Nominal wages fall by 5 percent
B) Real wages fall by 6 percent
C) Nominal wages fall by 1 percent
D) Real wages fall by 1 percent

Question

Quizplus · Accepted Answer

The real wage is the nominal wage adjusted for inflation. If inflation is higher than expected, the real wage falls. Here, the nominal wage increases by 5%, but inflation is 6%, so the real wage effectively falls by 1%.

Assume Contracts Between Workers and Employers That Call for an Increase