Final answer:
The inflation rate must be 4% when nominal wages increase by 7% and real wages increase by 3%; this is derived from the formula that connects nominal wage increases, real wage increases, and inflation rates.
Step-by-step explanation:
If nominal wages increase by 7% while real wages increase by 3%, we can deduce the inflation rate using the relationship between nominal wages, real wages, and inflation. The formula to connect these is:
Nominal Wage Increase = Real Wage Increase + Inflation Rate
By rearranging this formula to solve for the inflation rate, we get:
Inflation Rate = Nominal Wage Increase - Real Wage Increase
Using the given values:Inflation Rate = 7% - 3% = 4%
Therefore, the inflation rate must be 4% when the nominal wages increase by 7% and the real wages increase by 3%.