Question

In 2017, UAW workers are earnings $30.00 per hour. Suppose Ford and the United Auto Workers (UAW) agree in 2017 to a wage of $31.50 per hour for 2018. They expect (in 2017) the price level (as measured by the Consumer Price Index) to increase from 116.0 in 2017 to 115.5 in 2018, which is inflation of 5 percent. Suppose inflation instead is actually 2 percent between 2017 and 2018. Which of the following are true?

a. The UAW workers are better off.
b. Ford is worse off.
c. The UAW workers are worse off.
d. Ford is better off.
e. The UAW workers are unaffected.
f. Ford is unaffected.

Answer 1

When actual inflation is lower than expected inflation, workers benefit from a higher real wage increase than anticipated, making UAW workers better off. Ford, in contrast, pays more in real terms, making them worse off.

Step-by-step explanation:

The question is regarding the effects of inflation on the wage levels for UAW workers at Ford in the context of an unexpected difference between predicted and actual inflation rates for the year following 2017. In 2017, UAW workers earned $30.00 per hour and agreed on a wage increase to $31.50 for 2018, anticipating an inflation rate of 5%. However, if the actual inflation rate for 2018 turned out to be only 2%, this changes the purchasing power of the new wages.

In this scenario, the worker's actual pay increase is higher than the inflation rate, leading to an increase in real wages, which means their income has more purchasing power than expected. Thus, the UAW workers are better off since they can buy more goods and services with their higher-than-expected real salary. On the other hand, Ford has to pay more in real terms than it had anticipated, making Ford worse off financially, as their labor costs are effectively higher.

In conclusion, based on the provided wage and inflation figures for the year 2018, the correct option for the final answer is a. The UAW workers are better off and d. Ford is better off.