Suppose There Is a 3 Percent Increase in the Nominal

question 107

Multiple Choice

Suppose there is a 3 percent increase in the nominal wages of workers in an economy. The annual rate of inflation in the economy is about 6 percent. Which of the following is true?

• A) Real wages would fall by about 3 percent.
• B) Real wages would increase by about 20 percent.
• C) Real wages would fall by about 25 percent.
• D) Real wages would increase by about 50 percent.
• E) Real wages would increase by about 10 percent.

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Definitions:

Share Price

The present cost for purchasing or selling a single unit of a corporation's stock.

Constant-Growth DDM

A dividend discount model that assumes dividends grow at a constant rate in perpetuity, used to estimate the value of a stock.

Beta

A measure of a stock's volatility in relation to the overall market, indicating the stock's risk compared to the market average.

CAPM

Capital Asset Pricing Model, a framework used to determine the theoretical expected return of an asset, considering its risk relative to the market.