Why can money wages rise while workers are worse off?

Compare rates: if prices rise faster than money wages, real wages fall.

Which kind of inflation is an oil price shock?

Cost-push, because it raises production costs and shifts short-run aggregate supply left.

S6 Economics | Inflation and Unemployment Paper 1 (Prices and the Inflation Rate)

2026-11-04

This paper separates the index from the rate: the index measures the price level, the rate measures its change; only then do money and real wages make sense.

Attempt first, mark afterwards　Allow about twenty-five minutes; whenever a rise is asked for, divide by the base value instead of writing a difference.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10 items
Suggested time	About 25 minutes
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S6 Economics \| Inflation and Unemployment
Level	S6 (Secondary 6) Economics

02　Questions (10 items)

FoundationThe base year CPI is 100 and the basket costs $400 that year; this year the same basket costs $450. What is this year’s CPI?
FoundationContinuing from the last item, what is the inflation rate since the base year?
FoundationThe price index rises from 120 to 126. What is the inflation rate over the period?
FoundationIs inflation always harmful? Give one benefit and one cost.
IntermediateMoney wages rise from $20,000 to $22,000 while the index goes from 100 to 112.5. What are the rise in money wages and the change in real wages?
IntermediateIn a year import prices of raw materials jump and local wages follow. Is this demand-pull or cost-push inflation? Explain.
IntermediateThe nominal interest rate is 6 per cent and expected inflation 2 per cent. What is the real rate, and what nominal rate keeps the same real rate if expected inflation rises to 6 per cent?
ChallengeA government indexes pensions to last year’s inflation. If inflation suddenly jumps from 2 to 12.5 per cent, what happens to pensioners’ real purchasing power and who gains?
ChallengeWhy does a rising CPI not necessarily mean every household’s cost of living has risen? Give two reasons.
Error redoA classmate writes: money wages rose 10 per cent and the index is only 112.5, so real wages must have risen. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	112.5	The index is this year’s basket cost divided by the base-year cost, times 100: 450 divided by 400 gives 112.5.
2	12.5%	Inflation is the change in the index divided by the old index, times 100: 112.5 minus 100 over 100 gives 12.5 per cent.
3	5%	126 minus 120 over 120 gives 5 per cent; the rate compares the change in the index, not the price levels themselves.
4	Benefit: mild inflation lets real wages edge down without lay-offs; cost: cash loses purchasing power and unexpected inflation hurts creditors	Inflation is not a sin in itself; what matters is whether it is expected and moderate. Mild steady inflation lubricates wage adjustment, while rapid or unexpected inflation redistributes wealth and blurs price signals.
5	Money wages up 10 per cent; real wages $19,555.56, down 2.22 per cent on the base year	Money wages gain 22000 over 20000 minus one, or 10 per cent; real wages are 22,000 times 100 over 112.5, which is $19,555.56, a fall of 2.22 per cent against 20000.
6	Cost-push: materials and wages are costs of production, so aggregate supply shifts left	Demand-pull comes from a rightward shift of aggregate demand through consumption, investment, government spending or exports; dearer materials and wages raise costs and shift short-run aggregate supply left, lifting prices while output falls.
7	Real rate 4 per cent; the nominal rate must be 9 per cent	The real rate is nominal minus inflation: 6 minus 2 gives 4 per cent. Working back, nominal equals real plus inflation, 4 plus 6 gives 9 per cent, which is the Fisher effect.
8	Real purchasing power falls by about 10.5 per cent and the government, that is taxpayers, gains	Pensions rise only 2 per cent while prices rise 12.5 per cent, so the real pension becomes 102 over 112.5 of its old value, a loss near 10.5 per cent; unexpected inflation always favours debtors over creditors on fixed incomes.
9	Households buy different baskets, and the index carries quality and substitution bias plus regional price gaps	The CPI tracks one representative basket: a patient with heavy medical spending or a public-housing family facing no rent moves differently from the average; new products, quality change and district price gaps mean the index is only an average.
10	It must compare rates: money wages up 10 per cent against prices up 12.5 per cent, so real wages fall 2.22 per cent	The change in real wages is one plus the money rise over one plus the price rise, minus one, which is 1.1 over 1.12 minus one, about minus 2.22 per cent; an index above 100 only says goods are dearer than in the base year, not dearer than the wage rise.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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