Suppose you had the following information regarding the econ

Suppose you had the following information regarding the economy:

Year Nominal Wage CPI

1997 $15.00 100

1998 $16.50 110

1999 $25.00 150

Choose one: Which of the following best describes the behavior of the real wage rate?

a) it increased from 1997 to 1998 and increased further from 1998 to 1999.

b) it dropped from 1997 to 1998 and then remained the same from 1998 to 1999.

c) it increased from 1997 to 1998 and then increased from 1998 to 1999.

d) it remained the same from 1997 to 1998 and increased from 1998 to 1999.

Solution

From 1997-1998, both nominal wage and inflation increased by 10%. Hence, it remained the same during this period.

From 1998-1998, the inflation increases by 36.36% while nominal wage increased by 51.51%. Hence, real wage increased.

The correct answer is (d).