Question

If inflation turns out to be higher than households and firms had previously​ expected, the actual real wage will end up being______.A. the inverse of the expected real wage.B. equal to the expected real wage.C. higher than the expected real wage.D. lower than the expected real wage.

Answer 1

D. lower than the expected real wage.

Step-by-step explanation:

When individuals and firms agree on salaries and wages for their workforce they assume a certain level of inflation. If the inflation result higher than expected then the nominal increase in the wages which include a lower inflation premium ends up with a real yield lower than the agents expected.

This will make subsequent years infloation premium higher to avoid the further losses in the real level of wages