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Suppose Specific Automakers is considering signing a long-term contract with the union representing its workers. Specific Automakers and the union both agree that real wages should increase by 2%. Inflation is expected to be 5%, so they agree on a 7% nominal wage increase. Now, suppose inflation turns out to be higher than expected, coming in at 6%. This would ____ the union and ____ Specific Automakers because the real wage increase would now be ____

User Dzenesiz
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1 Answer

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Answer: Worsen; benefits

Step-by-step explanation:

Specific Automakers is signing a long term contract with the union who are the representative of workers.

Real wages should increase by = 2%

Expected inflation = 5%

Nominal wage increase = 7%

Actual inflation = 6%

Actual inflation is greater than expected inflation, so this would worsen the union and it is beneficial for the automakers because now real wage increase is only:

= Nominal wage - Actual inflation rate

= 7% - 6%

= 1%

This is an example of re-distributive cost of inflation.

User Orcun Sevsay
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