Analyzing real wages and inflation using CPI and nominal wage indices

Steps:

• Calculate inflation rates: Year 1-2: (102-100)/100 = 2%; Year 2-3: (105-102)/102 ≈ 2.94%; Year 3-4: (110-105)/105 ≈ 4.76%.
• Calculate real wage index for each year (nominal wage / CPI): Year 1: 100/100 = 100; Year 2: 102/102 = 100; Year 3: 107/105 ≈ 101.9; Year 4: 110/110 = 100.
• Compare real wages between years 3 and 4: Decreased from ≈101.9 to 100.
• Evaluate statements: A true (highest inflation 3-4); B true (constant at 100 for 1-2); C false (decrease 3-4); D true (rates rose from 2% to 4.76%).

Why C is not correct:

• Real wages = nominal wages / CPI index; percentage change ≈ 2.8% (nominal) - 4.76% (inflation) = -1.96% decrease, per standard deflator formula.

Why the others are correct (not wrong):

• A: 4.76% > 2.94% > 2%, greatest 3-4.
• B: Real index unchanged at 100 for 1-2.
• D: Successive increases in inflation rates over period.

Final answer: A, B, D