Caroline currently earns a real wage of $12.00 per hour; in other words, the amount of her paycheck each week is $12.00 per hour times the number of hours she works. suppose the price of orange juice is $2.00 per gallon; in this case, caroline's wage, in terms of the amount of orange juice she can buy with her paycheck, is gallons of orange juice per hour. when workers and firms negotiate compensation packages, they have expectations about the price level (and changes in the price level) and agree on a wage with those expectations in mind. if the price level turns out to be higher than expected, a worker's wage is than both the worker and employer expected when they agreed to the wage. caroline and her employer both expected inflation to be 3% between 2012 and 2013, so they agreed, in a two-year contract, that she would earn $12.00 per hour in 2012 and $12.36 per hour in 2013. however, suppose inflation between 2012 and 2013 actually turned out to be 5%, not 3%. for example, suppose the price of orange juice rose from $2.00 per gallon to $2.10 per gallon. this means that between 2012 and 2013, caroline's nominal wage by % , and her real wage by approximately .