Question

A labor contract provides a first year (nominal) wage of $50,000 per year, and specifies that the real wage will increase by 4% each year. The CPI is 2.0 in the first year, 2.1 in the second year, and 2.15 in the third year.

Please enter your answers as numeric responses rounded to the nearest dollar (ie. 32,900 or $32,900 not 32,900.00 or "Thirty-two thousand nine hundred dollars").

What is the real wage for the first year of this contract?

What is the real wage for the second year of this contract?

What is the real wage for the third year of this contract?

What is the nominal wage for the second year of this contract?

What is the nominal wage for the third year of this contract?

Answer 1

1. real wage for the first year:
$ 50,000
In the first year, real wages = nominal wages as the first year is the year of reference.
2.  real wage for the second year:
$47,619
real wage = Nominal wage * (CPI for the base year/CPI for the current year)
= 50,000*(20/20.1) = 47,619.0476 or 47,619

3. real wage for the third year:
$46,512
50,000 * (2/2.15) = 46,511.6279 or 46,512

4.  nominal wage for the second year;
$52,000
50,000+4% = 52,000

5.  nominal wage for the third year:
$54,080
52,000 + 4% = 54,080