Simone\'s paycheck each week is $12 per hour times the number of hours she works

Question

Simone's paycheck each week is $12 per hour times the number of hours she works. Simone thus currently earns a (nominal, real) wage of $12 per hour. Suppose the price of apple juice is $4 per gallon. The amount of apple juice she can buy with her paycheck is (1 gallons, 2 gallons, 3 gallons, 12 gallons) of apple juice, which represents her (nominal, real) wage.

When workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on a (nominal, real) wage with those expectations in mind. If the price level turns out to be lower than expected, a worker's (nominal, real) wage is (higer, lower) than both the worker and employer expected when they agreed to the wage.

Suppose that Simone and her employer both expected inflation to be 3% between 2011 and 2012. They signed a two-year contract stipulating that Simone would earn $12 per hour in 2011 and $12.36 per hour in 2012. However, actual inflation between 2011 and 2012 turned out to be 1% rather than the expected 3%. For example, suppose the price of apple juice rose from $4 per gallon to $4.04 per gallon. This means that between 2011 and 2012, Simone's nominal wage (increased, decreased) by (2% ,3% ,4%), and her real wage (increased, decreased) by approximately (2% ,3% ,4%).

Explanation / Answer

Simone's paycheck each week is $12 per hour times the number of hours she works. Simone thus currently earns a nominal wage of $12 per hour.

Suppose the price of apple juice is $4 per gallon. The amount of apple juice she can buy with her paycheck is 3 gallons of apple juice, which represents her real wage.

Explanation: Simsone  earns $12 per hour and the price of apple juice is $4 per gallon, Her nominal wage is $12 per hour, and her real wage is $12 per hour/ $4 per gallon of apple juice = 3 gallons 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 nominal wage with those expectations in mind. If the price level turns out to be lower than expected, a worker's real wage is higher than both the worker and employer expected when they agreed to the wage.

Explanation: Most wage agreements (and other contracts) specify a nominal wage. If prices are lower than expected, workers' paychecks can buy more goods and services than expected.

Suppose that Simsone....  This means that between 2011 and 2012, Simone's nominal wage increased by 3% , and her real wage increased by  approximately 2% .

Explanation :

To find the change in nominal wage, as the nominal wage changes from $12 to $12.36 per hour, it means increases by $0.36.

The percentage increase in nominal wage =( 0.36/12)*100 = 3%,

- Percentage Change in Real Wage = Percentage Change in Nominal Wage — Inflation Rate

To calculate inflation rate :

As prices of apple juice increases from $4 to $ 4.04 it means increases by $0.04

Percentage change in inflation = (0.04/4)*100 = 1%

So percentage change in real wage = 3% - 1% = 2%

So the real wage increases by 2%.

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