If the nominal wage of workers increases by 10% and the real wage of workers remains unchanged, then the overall price level must have:

	a.	decreased by less than 10%.
	b.	increased by more than 10%.
	c.	increased by 10%.
	d.	decreased by 10%.

Expert Solution

Real wage = Nominal wage / Price level

% change in (A/B) = % change in A + % change in B

Using above formulas we have :

% change in (Real wage) = % change in (Nominal wage / Price level)

=> % change in (Real wage) = = % change in (Nominal wage) - % change in (Price level)

Here Real wage does not changes => % change in (Real wage) = 0 and Nominal wage increased by 10% => % change in (Nominal wage) = 10%

=> 0 = 10% - % change in (Price level)

=> % change in (Price level) = 10%

Hence overall price level will increase by 10%.

Hence, the correct answer is (c) increased by 10%

Rahul Sunny answered 2 years ago

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