Yvette currently earns a wage of $12.00 per hour; in other words, the amount of her paycheck each week is $12.00 per hour times the number of hours she works. Suppose the price of milk is $2.50 per gallon; in this case, Yvette's wage, in terms of the amount of milk she can buy with her paycheck, is gallons of milk 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 lower than expected, a worker's wage is than both the worker and employer expected when they agreed to the wage. Yvette 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 2%, not 4%. For example, suppose the price of milk rose from $2.50 per gallon to $2.55 per gallon. This means that between 2012 and 2013, Yvette's nominal wage by , and her real wage by approximately .
Yvette currently earns a wage of $12.00 per hour; in other words, the amount of her paycheck each week is $12.00 per hour times the number of hours she works. Suppose the price of milk is $2.50 per gallon; in this case, Yvette's wage, in terms of the amount of milk she can buy with her paycheck, is gallons of milk 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 lower than expected, a worker's wage is than both the worker and employer expected when they agreed to the wage. Yvette 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 2%, not 4%. For example, suppose the price of milk rose from $2.50 per gallon to $2.55 per gallon. This means that between 2012 and 2013, Yvette's nominal wage by , and her real wage by approximately .
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 9PA
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Yvette currently earns a wage of $12.00 per hour; in other words, the amount of her paycheck each week is $12.00 per hour times the number of hours she works. Suppose the price of milk is $2.50 per gallon; in this case, Yvette's wage, in terms of the amount of milk she can buy with her paycheck, is
gallons of milk 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 lower than expected, a worker's wage is than both the worker and employer expected when they agreed to the wage.
Yvette 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 2%, not 4%. For example, suppose the price of milk rose from $2.50 per gallon to $2.55 per gallon. This means that between 2012 and 2013, Yvette's nominal wage by
, and her real wage by approximately .
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