Question

Suppose General Electric paid its line workers $10 per hour in 2015 when the Consumer Price Index was 100. Suppose that deflation occurred and the aggregate price level fell to 80 in the 2016. Instructions: Round your answers to two decimal places. a. GE needed to pay its workers $ in 2016 in order to keep the real wage fixed at $10. b. GE needed to pay its workers $ in 2016 if it wanted to increase the real wage by 10 percent. c. If GE kept the wage fixed at $10 per hour in 2016, in real terms, its workers got a % increase in real wages.

Answer 1

Answer:

a.) $8.00

b.) $8.80

c.)25%

Explanation:

a.) In order to keep real wage (RW) fixed at $10, the company must consider the decrease in the Consumer Price Index to account for the deflation:

$Wage = RW*\frac{P_{2016} }{P_{2015}} \\Wage = 10*\frac{80}{100}\\Wage = 8$

GE needed to pay its workers $8.00 in 2016.

b.) To increase the real wage by 10% simply multiply the real wage found in item a.) by 1.1:

$RW = 8*1.1 = 8.8$

GE needed to pay its workers $8.80 in 2016 if it wanted to increase the real wage by 10 percent.

c.) To find out how much that increase would be, divide the new wage by the expected real wage and subtract 1.

$Raise = \frac{10}{8} - 1\\Raise = 0.25$

Its workers got 25% increase in real wages.