Question

If workers negotiate for a 5% nominal wage increase and expect a 4% inflation rate, what happens if the actual inflation rate is 7%?

Answer 1

If workers negotiate for a 5% nominal wage increase and expect a 4% inflation rate but the actual inflation rate is 7%, the workers would experience a decrease in their real wages.

Step-by-step explanation:

If workers negotiate for a 5% nominal wage increase and expect a 4% inflation rate, but the actual inflation rate is 7%, the workers would experience a decrease in their real wages. Here's how it works:

1. The nominal wage increase of 5% is the increase in wages based on the current prices.
2. The expected 4% inflation rate means that prices are expected to increase by 4%.
3. However, if the actual inflation rate turns out to be 7%, then prices increase by a higher rate than expected.
4. As a result, the increase in wages of 5% is not enough to keep up with the increase in prices of 7%.
5. This means that the purchasing power of the workers' wages decreases, as they can buy less with their increased wages due to higher prices.

In conclusion, when the actual inflation rate is higher than expected, workers' real wages decrease despite a nominal wage increase.