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 be

Question

a.

125
b.

121
c.

135
d.

132

Answer 1

To determine the price level this year, we can use the concept of real wage, which adjusts nominal wages for the price level.

1. Real wage last year:

   • Nominal wage last year = $10
   • Price level last year = 120
   • Real wage last year = Nominal wage / (Price level / 100)
   • Real wage last year = $10 / (120 / 100) = $10 / 1.2 = $8.33

2. Real wage this year:

   • Nominal wage this year = $11
   • Let the price level this year be \( P \).
   • Real wage this year = $11 / (P / 100)

3. Setting the real wages equal to find the price level:

   • We want the real wage this year to be equal to the real wage last year: \[ \frac{11}{P / 100} = 8.33 \]

   Rearranging gives: \[ 11 = 8.33 \cdot \frac{P}{100} \] \[ P = \frac{11 \cdot 100}{8.33} \] \[ P \approx \frac{1100}{8.33} \approx 132 \]

So, the price level this year must be approximately 132.

Thus, the correct answer is d. 132.