A company's management team wants to ensure their employees' purchasing power does not decrease next year. They anticipate that the general price level will increase by 3%. What percentage change in the nominal wage must the company provide to keep the real wage constant? Explain your reasoning.

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The real wage ($w$) is defined as the nominal wage ($W$) divided by the general price level ($P$). This relationship is expressed by the formula: $w = \frac{W}{P}$. It is a foundational assumption within the WS-PS model.

Formula for the Real Wage

An individual's annual nominal earnings increase from $50,000 to $52,500. During the same period, the general price level index rises from 1.0 to 1.05. Based on this information, what has happened to the individual's purchasing power?

Maintaining Purchasing Power

Analyze the employee's financial situation based on the case study. Will their purchasing power increase, decrease, or stay the same? Justify your answer by explaining the relationship between the changes in their earnings and the changes in the price level.

Wage Negotiation Analysis

If an employee receives a 5% increase in their nominal wage, but the general price level also increases by 5% over the same period, their real wage has increased.

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