7. Real wages, nominal wages, and unexpected changes in the pricelevel Maria's paycheck each veek is $12 per hour times the number of hours she works. Maria thus currently earns a wage of $12 per hour. Suppose the price of sparkling vater is $4 per gallon. The amount of sparkling vater she can buy vith her paycheck is of sparkling water, which represents her wage. When workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on vage with those expectations in mind. If the price level turns out to be lovwer than expected, a worker's wage is than both the worker and employer expected when they agreed to the vage. Suppose that Maria and her employer both expected inflation to be 3% betvween 2010 and 2011. They signed a two-year contract stipulating that Maria would earn $12 per hour in 2010 and $12.36 per hour in 2011. However, actual inflation between 2010 and 2011 turned out to be 1% rather than the expected 3%. For example, suppose the price of sparkling vater rose from $4 per gallon to $4.04 per gallon. This means that between 2010 and 2011, Maria's nominal vage ▼ by▼, and her real wage by approximately
7. Real wages, nominal wages, and unexpected changes in the pricelevel Maria's paycheck each veek is $12 per hour times the number of hours she works. Maria thus currently earns a wage of $12 per hour. Suppose the price of sparkling vater is $4 per gallon. The amount of sparkling vater she can buy vith her paycheck is of sparkling water, which represents her wage. When workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on vage with those expectations in mind. If the price level turns out to be lovwer than expected, a worker's wage is than both the worker and employer expected when they agreed to the vage. Suppose that Maria and her employer both expected inflation to be 3% betvween 2010 and 2011. They signed a two-year contract stipulating that Maria would earn $12 per hour in 2010 and $12.36 per hour in 2011. However, actual inflation between 2010 and 2011 turned out to be 1% rather than the expected 3%. For example, suppose the price of sparkling vater rose from $4 per gallon to $4.04 per gallon. This means that between 2010 and 2011, Maria's nominal vage ▼ by▼, and her real wage by approximately
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. Real wages, nominal wages, and unexpected changes in the pricelevel
Maria's paycheck each veek is $12 per hour times the number of hours she works. Maria thus currently earns a
wage of $12 per hour.
Suppose the price of sparkling vater is $4 per gallon. The amount of sparkling vater she can buy vith her paycheck is
of sparkling
water, which represents her
wage.
When workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on
vage with those expectations in mind. If the price level turns out to be lovwer than expected, a worker's
wage is
than both the worker and employer expected when they agreed to the vage.
Suppose that Maria and her employer both expected inflation to be 3% betvween 2010 and 2011. They signed a two-year contract stipulating that
Maria would earn $12 per hour in 2010 and $12.36 per hour in 2011. However, actual inflation between 2010 and 2011 turned out to be 1% rather
than the expected 3%. For example, suppose the price of sparkling vater rose from $4 per gallon to $4.04 per gallon. This means that between 2010
and 2011, Maria's nominal vage
▼ by▼, and her real wage
by approximately
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