Maria currently earns a real/nominal wage of $12.00 per hour; in other words, the amount of her paycheck each week is $12.00 per hour times the number of hours she works. suppose the price of milk is $3.00 per gallon; in this case, maria�s real/nominal wage, in terms of the amount of milk she can buy with her paycheck, is 5 / 4 / 3 / 12 gallons of milk per hour. when workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on a real/nominal wage with those expectations in mind. if the price level turns out to be lower than expected, a worker�s real/nominal wage is higher/lower than both the worker and employer expected when they agreed to the wage. maria and her employer both expected inflation to be 3% between 2010 and 2011, so they agreed, in a two-year contract, that she would earn $12.00 per hour in 2010 and $12.36 per hour in 2011. however, suppose inflation between 2010 and 2011 actually turned out to be 2%, not 3%. for example, suppose the price of milk rose from $3.00 per gallon to $3.06 per gallon. this means that between 2010 and 2011, maria�s nominal wage increased/decreased by 1 / 5 / 3%, and her real wage increased/decreased by approximately 1 / 5/ 3%.

1) 12/3= 4 gallons of milk per hour is her real wage

Her nominal wage is $12 per hour, we then divide her nominal wage by the price of gallon of milk in order to find out how many gallons of milk can she afford from one hour of work. 12/3=4 so 4 gallons of milk is her real wage per hour.

2) Workers and firms negotiate compensation packages and agree on a Nominal wage with those expectations in mind, as nominal wage is the actual amount of money that they get. If the price level turns out to be lower than expected, a workers nominal wage is the same because he will be paid the same amount of money, but his real wage will be higher than expected, because real wage refers to the purchasing power of your money and when price levels are lower than expected the worker can buy more goods and services from the same nominal wage, which means that his real wage is higher than expected

3) Her Nominal wage increased from 12 to 12.36 which is

(12.36-12) =0.36

0.36/12= 3%

So her Nominal wages increased by 3%

If  inflation was 3% the price of milk would have been (1.03*3)= 3.09 but because inflation was 2% the price of milk was (1.03*3) = 3.06 so in order to find out the increase in real wage we will subtract inflation from the increase in nominal wage

Increase in nominal wage 3%

Inflation 2%

Real wage increase =3-2

= 2% real wage increase.

Explanation:

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