To determine the price level this year, we can use the concept of real wages. Real wages are calculated by adjusting nominal wages for the price level. The formula for real wage can be expressed as:
\[ \text{Real Wage} = \frac{\text{Nominal Wage}}{\text{Price Level}} \]
Last Year:
- Nominal Wage Last Year = $10
- Price Level Last Year = 120
Calculating the real wage for last year:
\[ \text{Real Wage Last Year} = \frac{10}{120} = \frac{1}{12} \approx 0.0833 \]
This Year:
- Nominal Wage This Year = $11
- Price Level This Year = \( P \) (unknown)
Based on the information provided, you are unable to purchase the same amount of goods as last year, which means your real wage this year is less than it was last year. Therefore:
\[ \text{Real Wage This Year} < \frac{1}{12} \]
Calculating the real wage for this year:
\[ \text{Real Wage This Year} = \frac{11}{P} \]
Setting up the inequality:
\[ \frac{11}{P} < \frac{1}{12} \]
Cross-multiplying gives:
\[ 11 \cdot 12 < P \cdot 1 \]
\[ 132 < P \]
This means \( P \) must be greater than 132. Among the options provided:
- a. 135
- b. 132
- c. 121
- d. 125
The only option greater than 132 is:
a. 135.
Therefore, the price level this year must be 135.
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