Maria's paycheck each week is $$12$ per hour times the number of hours she works. Maria thus currently earns a$$wage of $$12$ per hour. Suppose the price of milk is $$4$ 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 Maria and her employer both expected inflation to be $3\%$ between $2011$ and $2012.$ They signed a two$-$year contract stipulating that Maria would earn $$12$ per hour in $2011$ and $$12\mathrm{.}36$ per hour in $2012.$ However, actual inflation between $2011$ and $2012$ turned out to be $5\%$ rather than the expected $3\%.$ For example, suppose the price of milk rose from $$4$ per gallon to $$4\mathrm{.}20$ per gallon. This means that between $2011$ and $2012,$ Maria's nominal wage$$by$,$ and her real wage$$by approximately$.$