Alabor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract. the cpi is 1.00 in the first year and 1.09 in the second year. what dollar wage must be paid in the second year?

Dollar paid in year 2 :   $16.67

Explanation:

Inflation is the increase in the general price level. Inflation erodes the value of money.

Consumer Price Index (CPI ): This is the weighted average price of a basket of goods and services consumed by a typical consumer. It is used to measure the rate of inflation.

The increase in the CPI is taken to be the rate of inflation. For example, the CPI rose to 1.09 from 1.00, this implies an inflation rate of 9% within the time period in focus.

Cost of living adjustment (COLA). A agreement with the government to adjust the entitlements ( wages, social benefits, e.t.c.) of workers for the negative impact of inflation- to ensure that real wage is preserved.

Real wage is the amount of goods and services that every dollar will buy.

Real wage=  CPI in the base year    × Nominal wage

                      CPI in the current year

Nominal wage is the wage in dollar quantity which has not been adjusted for inflation.

To calculate the Dollar wage to be paid in second year (Nominal wage after increase  and adjustments), we use the formula below:

Initial wage × inflation rate ×  increase in wage rate

=$15 × 1.09 × 1.02=  $16.67