Suppose that a labor union leader is trying to bargain for an increase in union workers' real wages of 5 percent.If he expected the price level to rise at a rate of 3 percent this year,how much would nominal wages need to increase for him to accomplish his objective?
A) 2 percent
B) 3 percent
C) 5 percent
D) 8 percent
E) 15 percent

Question

Quizplus · Accepted Answer

The formula for nominal wage is: 
Nominal wage = Real wage / (1 + inflation rate)

Substituting the given values, we get: 
Nominal wage = 1.05 / (1 + 0.03) = 1.081

Therefore, nominal wages would need to increase by 8.1% (rounded to 8%) to achieve a real wage increase of 5%. Thus, the correct choice is D.

Suppose That a Labor Union Leader Is Trying to Bargain