If inflation is 5% and a worker receives a 4% wage increase, then how does the worker's real wage change?

Step 1: Understand the terms Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. A wage increase is an increase in the amount of money a worker earns.

Step 2: Calculate the inflation-adjusted wage increase If inflation is 5% and the worker receives a 4% wage increase, the worker's real wage increase is less than the nominal (or face-value) increase of 4%. This is because the cost of goods and services that the worker needs to buy has increased by 5%.

Step 3: Determine the real wage change To find the real wage change, you subtract the inflation rate from the wage increase. So, 4% (wage increase) - 5% (inflation) = -1%.

Step 4: Interpret the result The -1% means that, in real terms, the worker's wage has actually decreased by 1%. Even though the worker is earning 4% more in nominal terms, the cost of living has increased by 5%, so the worker's purchasing power has decreased.