Real wages, nominal wages, and unexpected changes in the price level Deborah's paycheck each week is $10 per hour times the number of hours she works. Deborah thus currently earns a wage of $10 per hour. Suppose the price of milk is $2 per gallon. The amount of milk she can buy with her paycheck is of milk, which represents her wage. 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. Suppose that Deborah and her employer both expected inflation to be 4% between 2010 and 2011. They signed a two-year contract stipulating that Deborah would earn $10 per hour in 2010 and $10.40 per hour in 2011. However, actual inflation between 2010 and 2011 turned out to be 5% rather than the expected 4%. For example, suppose the price of milk rose from $2 per gallon to $2.10 per gallon