6. Real wages, nominal wages, and unexpected changes in the price level Crystal currently earns. nominal wage of $12.00 per hour; in other words, the amount of her paycheque each week is $12.00 per hour times the number of hours she works. Suppose the price of apple juice is $2.40 per litre; in this case, Crystal's wage, in terms of the amount of apple juice she can buy with her paycheque, is litres 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 wage with those expectations in mind. If the price level turns out to be higher than expected, a worker's than both the worker and employer expected when they agreed to the wage. ▼wage is a Crystal and her employer both expected inflation to be 4% between 2012 and 2013, so they agreed, in a two-year contract, that she would earn $12.00 per hour in 2012 and $12.48 per hour in 2013. However, suppose inflation between 2012 and 2013 actually turned out to be 5%, not 4%. For example, suppose the price of apple juice rose from $2.40 per litre to $2.52 per litre. This means that between 2012 and 2013, Crystal's nominal wage and her real wage by approximately

6. Real wages, nominal wages, and unexpected changes in the price level Crystal currently earns. nominal wage of $12.00 per hour; in other words, the amount of her paycheque each week is $12.00 per hour times the number of hours she works. Suppose the price of apple juice is $2.40 per litre; in this case, Crystal's wage, in terms of the amount of apple juice she can buy with her paycheque, is litres 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 wage with those expectations in mind. If the price level turns out to be higher than expected, a worker's than both the worker and employer expected when they agreed to the wage. ▼wage is a Crystal and her employer both expected inflation to be 4% between 2012 and 2013, so they agreed, in a two-year contract, that she would earn $12.00 per hour in 2012 and $12.48 per hour in 2013. However, suppose inflation between 2012 and 2013 actually turned out to be 5%, not 4%. For example, suppose the price of apple juice rose from $2.40 per litre to $2.52 per litre. This means that between 2012 and 2013, Crystal's nominal wage and her real wage by approximately

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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