Stella currently earns a_____wage of $10.00 per hour; in other words, the amount
ID: 1227424 • Letter: S
Question
Stella currently earns a_____wage of $10.00 per hour; in other words, the amount of her paycheck each week is $10.00 per hour times the number of hours she works. Suppose the price of apple juice is $2.00 per gallon; in this case, Stella's_____wage, in terms of the amount of apple juice she can buy with her paycheck, is_____of apple juice per hour. When workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on a_____wage with those expectations in mind. If the price level turns out to be higher than expected, a worker's_____wage is_____than both the worker and employer expected when they agreed to the wage. Stella and her employer both expected inflation to be 4% between 2010 and 2011, so they agreed, in a two-year contract, that she would earn $10.00 per hour in 2010 and $10.40 per hour in 2011. However, suppose inflation between 2010 and 2011 actually turned out to be 5%, not 4%. For example, suppose the price of apple juice rose from $2.00 per gallon to $2.10 per gallon. This means that between 2010 and 2011, Stella's nominal wage_____by_____, and her real wage_____by approximately_____.Explanation / Answer
(a) Stella currently earns Nominal wage of $10.
Price of apple juice is $2, so Stella's Real (Relative) wage is 5 Gallon (= $10 / $2) of apple juice.
(b) When workers & firms negotiate, they agree on a Nominal wage with expectations in mind.
If price level is higher than expected, a workers Real wage is Lower.
(c) Stella's nominal wage increased by $0.4 (= $10.4 - $10) [Or 4%].
Her real wage decreased by approximately 1%.
** Real wage in 2010 = $10 / $2 = 5 apple juice
Real wage in 2011 = $10.4 / $2.1 = 4.95 apple juice
Decrease in real wage = (4.95 / 5) - 1 = 0.99 - 1 = - 0.01 = - 1%
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