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Homework answers / question archive / Suppose your nominal wage fell and deflation occurred

Suppose your nominal wage fell and deflation occurred

Economics

Suppose your nominal wage fell and deflation occurred. Did your real wage increase or decrease?

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Answer:

Deflation refers to a general lowering of prices in the economy , so price level in economy is less.

Nominal wage is the actual wage a worker gets.

Real wages show the value of wages adjusted for inflation. Real wages are a guide to how living standards have changed.

Real wages = nominal wages / price level.

Now if nominal wage decreases and price level decreases as same proportion say 5% both

Then there no net change in real wages of the worker.

If nominal wages decrease < price level decrease then real wages will increase

For eg nominal wage decrease by 5% and price level by 3% then real wages increases by 2%

If nominal wage decrease is less then decrease inprice level due to deflation then real wages decreases

For eg 2% decrease in nominal wages and 5% decrease in price level then real wages decreases by 3% which is favourable for the worker as his purchasing power increased .