Question

Suppose General Electric paid its line workers $12 per hour in 2015 when the Consumer Price Index was 100. Suppose that deflation occurred and the aggregate price level fell to 84 in 2016. Instructions: Round your answers to two decimal places. a. GE needed to pay its workers $ in 2016 in order to keep the real wage fixed at $12. b. GE needed to pay its workers $ in 2016 if it wanted to increase the real wage by 8 percent. c. If GE kept the wage fixed at $12 per hour in 2016, in real terms, its workers got a % increase in wages.

Answer 1

Answer:

(a) N = 10.08

(b) N = 10.89

(c) 19.05

Explanation:

(a)

$Real\ wage=\frac{Nominal\ wage}{CPI\ in\ the\ given\ year}\times CPI\ in\ the\ base\ year$

$12=\frac{N}{84}\times 100$

N = 10.08

(b)

$Real\ wage=\frac{Nominal\ wage}{CPI\ in\ the\ given\ year}\times CPI\ in\ the\ base\ year$

$12\times1.08=\frac{N}{84}\times 100$

N = 10.89

One thing to observe here is that percentage increase in the real wage is always equal to the percentage increase in nominal wage. Same can be verified with different values.

(c) It's given that the real wage is kept at $ 12 which was the same in the last year as well.

So % increase would be zero.

However, if that $ 12 is considered as a Nominal wage in the current year,then,

$Percentage increase=\frac{12-10.08}{10.08}\times100$

$=\frac{192}{10.08}$

= 19.05