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$3.$ Real wages, nominal wages, and unexpected changes in the price level

Amy currently earns a nominal grad wage of $$12\mathrm{.}00$ per hour; in other words, the amount of her paycheck each week is $$12\mathrm{.}00$ per hour times the number of hours she works. Suppose the price of apple juice is $$2\mathrm{.}50$ per gallon; in this case, Amy's wage, in terms of the amount of apple juice she can buy with her paycheck, is gallons of apple juice per hour.

When workers and firms negotiate compensation packages, they have expectations about the price level $($and changes in the price level$)$ and agree on a nominal grad wage with those expectations in mind. If the price jevel turns out to be lower than expected, a worker's real grad wage is than both the worker and employer expected when they agreed to the wage.

Amy and her employer both expected inflation to be $4\%$ between $2012$ and $2013,$ so they agreed, in a two$-$year contract, that she would earn $$12\mathrm{.}00$ per hour in $2012$ and $$12\mathrm{.}48$ per hour in $2013.$ However, suppose inflation between $2012$ and $2013$ actually turned out to be $2\%,$ not $4\%.$ For example, suppose the price of apple juice rose from $$2\mathrm{.}50$ per gallon to $$2\mathrm{.}55$ per gallon. This means that between $2012$ and $2013,$ Amy's nominal wage increased grad by $,$ and her real wage decreased grad by approximately $1\%gra{d}_{?}.$

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