Question

A professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy fewer number of goods and services than she bought last year. A. Her real and nominal salary have fallen. B. Her real and nominal salary have risen. C. Her real salary has fallen and her nominal salary has risen. D. Her real salary has stayed constant and her nominal salary has risen.

Answer 1

Answer:

Her real salary has fallen and her nominal salary has risen. The correct option is C

Explanation:

NOMINAL SALARY is defined as the actual amount of money paid to a worker as compensation for work done monthly.

REAL SALARY or wages is defined as the quantity of goods and services an individual can purchase from a monthly income. Therefore it is affected by an increase or decrease in the general price level in an economy( inflation). For instance, if an individual nominal wage is increased by 10% and inflation is 0%( that is, there was no increase in price of goods in the market) then the individuals real wage is increased by 10% too. But if inflation is 10%, then the real wage will be 0% ( meaning the inflation is rising at the same rate with the nominal wage increase).

In the case of the professor, she had $200 increase in her monthly nominal wage and she can buy fewer number of goods and services than she bought last year(increased inflation). Therefore her real salary has fallen because even with the $200 increase, she couldn't buy her usual quantity of goods.