Question

In: Economics

Suppose General Electric paid its line workers $10 per hour in 2015 when the Consumer Price...

Suppose General Electric paid its line workers $10 per hour in 2015 when the Consumer Price Index was 100. Suppose that deflation occurred and the aggregate price level fell to 88 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 $10.

    b. GE needed to pay its workers $ in 2016 if it wanted to increase the real wage by 6 percent.

    c. If GE kept the wage fixed at $10 per hour in 2016, in real terms, its workers got a  % increase in wages.

Solutions

Expert Solution

a)

the required wage in year y =( wage in year x/ CPI in year x)* CPI in year y

the required wage in the year 2016 =(10/100)*88=$8.8

GE needed to pay its workers $8.8 in 2016 in order to keep the real wage fixed at $10

b)

The wage =real wage in 2016 * (1+6%)

=8.8*(1.06)

=$9.328

GE needed to pay its workers $9.328 in 2016 if it wanted to increase the real wage by 6 percent

c)

Change in real wage =((10-8.8)/8.8)*100

=13.6363636

=13.64

If GE kept the wage fixed at $10 per hour in 2016, in real terms, its workers got a 13.64 % increase in wages

Rahul Sunny answered 2 years ago
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