Question

In: Economics

8. Nominal and real wages have increased over time in the U.S. How fast will your...

8. Nominal and real wages have increased over time in the U.S. How fast will your nominal wage increase if you receive an increase each year that is comparable to what has occurred on average since 1929? About how long will it take the purchasing power of your wage to double if your real wage increases at the average rate experienced in the U.S. since 1929?

Expert Solution

Assume wage in the year 1929 was $100.

Nominal wage:

Suppose the growth rate is 10% or 0.10 each year.

Nominal wage would increase (1 + rate = 1 + 0.10 =) 1.10 times each year (Answer)

Real wage:

Consumer Price Index (CPI) should be considered here.

CPI of 1929 (on average) = 17.100

Double of this index = 17.100 × 2 = 34.200

This appears nearly 1968, when the average CPI is 34.800

Hence,

CPI of 1968 (on average) = 34.800

We have to calculate the number of years it will be double if CPI is maintained.

Real wage would be double in 1968 = Real wage in 1929 × (CPI of 1968 / CPI of 1929)

= $100 × (34.800 / 17.100)

= 3,480 / 17.100

= $203.51 (more than double)

Therefore, the difference of year would be the required number of years.

Number of years = 1968 – 1929

= 39

Answer: it will take 39 years.

Rahul Sunny answered 1 month ago

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