Question

Suppose that nominal wage growth is 5 percent per year and the inflation rate( the growth...

Suppose that nominal wage growth is 5 percent per year and the inflation rate( the growth of aggregate prices) is 2% per year, the growth of the real wage rate is

A 10 percent per year

B -3 percent per year

C 3 percent per year

D 7 percent per year

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Answer #1

Asnwer

Formula :

(i) Real wage = Nominal wage/Price level

(ii) % change in (A/B) = % change in A - % change in B

Thus using above forumlas we have :

% change in (Real wage) = % change in (Nominal wage/Price level) = % change in (Nominal wage) - % change in (price level)

Here, % change in Nominal wage5% amd % change in price level = inflation rate = 2%

=> % change in (Real wage) = 5% - 2% = 3%

So, the growth of the real wage rate is 3%

Hence, the correct answer is (C) 3 percent per year.

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