The nominal annual wage increases from $20,000 to $21,000, while the price level increases by 7 percent. In this case, the percentage change in the real annual wage is about
A) −1 percent.
B) −2 percent.
C) 3 percent.
D) 5 percent.

Question

Quizplus · Accepted Answer

The formula for calculating the real wage is:
real wage = nominal wage / price level

Initially, the real wage is:
real wage = 20,000 / 1 = 20,000

After the price level increases by 7 percent, the real wage becomes:
real wage = 21,000 / 1.07 ≈ 19,626.17

The percentage change in the real wage is therefore:
change in real wage = [(19,626.17 - 20,000) / 20,000] x 100% ≈ -1.87%

Rounding to the nearest whole number, we get a percentage change of about -2 percent, which corresponds to choice B.

The Nominal Annual Wage Increases from $20,000 to $21,000, While