1- your boss offers you a wage increase of 10 percent . is it possible that you
ID: 1195136 • Letter: 1
Question
1- your boss offers you a wage increase of 10 percent . is it possible that you are worst off with the wage increase than you were before? Explain your answer!
2- if the government implements a spending and tax policy in which it promises to neither increase nor decrease spending and taxes, ist still possible for the budget deficit to increase or decrease? Explain
3-Between October 2004 and October 2005, rea lGDP in the united states increased by 3.6 percent, while non farm payroll jobs increased by only 1.4 percent. How is it possible for output to increase without a proportional increase in the number of workers?
Explanation / Answer
Q1. The wage increase offered to us is nominal wage increase.
In order to ascertain whether we would be better-off or worse-off with the nominal wage increase, we have to compare the real wage after increase and real wage before increase.
Real wage is calculated by subtracting inflation from nominal wage rate.
If percentage change in real wage rate turns out to be positive number then we would be better after increase in nominal wage rate other wise not.
In the given case, nominal wage is increasing by 10 percent. If inflation rate turns out to be more than 10 percent then in that case percentage change in real wage rate would turn out to be negative.
For example, if inflation rate turns out to be 12%.
% change in real wage = % change in nominal wage - Inflation rate
= 10% - 12%
= -2%
As we can see real wage is decreasing by 2% even though nominal wage is increasing by 10%. Decrease in real wage implies that we are worse off that before even though we have got wage increase in nominal terms.
So, it is possible that we are worse-off with wage increase than we are before if inflation rate turns out to be greater than the wage increase (10 percent) offerred to us.
The nominal wage has increased by 10 percent. If inflation rate turns out
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