Homework Answers
Nominal wage = $20
Rise in real wage = 4% each year
CPI = 2.0 for 1st year
CPI = 2.05 for 2nd year
CPI = 2.1 for 3rd year
Nominal wage change = Real wage change + Inflation rate
Inflation rate is calculated as = [(CPI in year 2 - CPI in year 1) / CPI in year 1] * 100
= [(2.05 - 2) / 2] * 100 = 2.5%
Nominal wage change = 2.5% + 4% = 6.5%
Nominal wage in 1st year would be = 20 * 1.065 = 21.3
Option A is correct.
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