The real wage will rise if the nominal rage:?

Question

a)falls more rapidly than the general price level

b)increases at the same rate as labor productivity

c)increases more rapidly than the general price level

d)falls more rapidly than the general price level

Answer 1

The correct answer is :

c)increases more rapidly than the general price level

[ Let real wage be r, nominal wage is w and price level = P.

So, r = w/P or, r*P = w . Taking derivatives on both sides with respect to time t, we get P* (dr/dt ) + r*(dP/dt)= dw/dt.

Dividing both sides by w, we get

(P/w)*(dr/dt) + (r/w)* (dP/dt) = (dw/dt)/w,

or, (dr/dt)/r + (dp/dt)/P = (dw/dt)/w

(since, P/w=1/r and (r/w= 1/P).

Thus, growth rate of r + growth rate of P = growth rate of w.

or, growth rate of r= growth rate of w - growth rate of P

thus, growth rate of r will be  positive if, growth rate of w is greater than growth rate of P]

Answer 2

c)increases more rapidly than the general price level

This means that purchasing power of worker will grow faster than inflation, thus change in "real wage" = "increase in nominal wage" - "inflation" will be positive (thus rising).