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Suppose that Becky and her employer both expected inflation to be 4% between 2011 and 2012. They signed a two-year contract stipulating that Becky would
Suppose that Becky and her employer both expected inflation to be 4% between 2011 and 2012. They signed a two-year contract stipulating that Becky would earn $10 per hour in 2011 and $10.40 per hour in 2012. However, actual inflation between 2011 and 2012 turned out to be 5% rather than the expected 4%. For example, suppose the price of apple juice rose from $2 per gallon to $2.10 per gallon. This means that between 2011 and 2012, Becky's nominal wage by , and her real wage by approximately
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