Megan currently earns a nominal wage of $$12\mathrm{.}00$ per hour; in other words, the amount of her paycheque each week is $$12\mathrm{.}00$ per hour times the number of hours she works. Suppose the price of sparkling water is $$2\mathrm{.}40$ per litre; in this case, Megan's $q,$ wage, in terms of the amount of sparkling water she can buy with her paycheque, is $$ litres of sparkling water 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 $$ wage with those expectations in mind. If the price level turns out to be higher than expected, a worker's $$ wage is

$$ than both the worker and employer expected when they agreed to the wage.

Megan 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 $5\%,$ not $4\%.$ For example, suppose the price of sparkling water rose from $$2\mathrm{.}40$ per litre to $$2\mathrm{.}52$ per litre. This means that between $2012$ and $2013,$ Megan's nominal wage $$ by $,$ and her real wage $$ by approximately $q,.$