Chapter 14, Problem 2MCQ

To determine

The question requires us to determine the change in the real wage.

Explanation of Solution

Real wage will remain the same between year 1 to year 2 when wage and price double.

An increase in price causes the purchasing power of money to fall, but the simultaneous increase in income level compensates for the higher price partially or completely, and the individual remains unaffected.

  $\text{Real wage = }\frac{\text{Nominal wage}}{\text{Price}}$

Suppose, the price in year 1 = 100,

Price in year 2 = 200

Wage in year 1 = $10,000

Wage in year 2 = $20,000 (double of year 1)

  $\begin{array}{c}\text{Real wage in year 1 = }\frac{\text{\$10,000}}{\text{100}}\\ \text{=\$100}\\ \text{Real wage in year 2 = }\frac{\text{\$20,000}}{\text{200}}\\ \text{=\$100}\end{array}$

So, the real wage will stay the same.

Option “c” is correct.