Answer to Question #276339 in Economics for Wolsky

Question

Suppose your nominal wage now is €2000. Inflation is 2.5% a year. Your employer is going to raise your wage by 25%. How much will you earn at the end of the year if your employment contract takes into account Inflation?

(Apply the adjusted by Fisher Real interest rate equation in your calculations)

Answer 1

If inflation is not taken into account in your contract, then you will earn:

2000×(1 + 0.25 - 0.025) = 2450.

If your employment contract takes into account Inflation, then you will earn:

2000×(1 + 0.25) = 2500.