Question

Last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. The price level this year must bea. 135b. 132c. 125d. 121

Answer 1

Answer:

The correct answer is A) 135

Explanation:

Your nominal age increased 10% from $10/hour to $11/hour, and you are unable to buy the same amount of goods last year, that is to say, you have lost purchasing power, therefore, the price level should have risen more than 10%.

If the price level is 120, and increases to 125, the increase is 4,1%

If the price level is 120, and increases to 132, the increase is 10%

Finally, if the price level is 120, and increases to 135, the increase is 12%, which is higher than the 10% increase of the nominal wage, and causes the purchasing power of the wage to decrease, making you unable to buy more goods.