Question

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 3%. Inflation is expected to be 6%, so they agree on a 9% nominal wage increase. Now, suppose inflation turns out to be higher than expected, coming in at 7%. This would_______the union and Specific Automakers because the real wage increase would now be_______. This is an example of:_______.

A. The re-distributive cost of inflation.
B. The re-source cost of inflation.

Answer 1

1. Worsen

2. Benefits

3. 1%

4. A. The re-distributive cost of inflation.

Step-by-step explanation:

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

Where, Real wages should increase by = 3%

Expected inflation = 6%

Nominal wage increase = 9%

Actual inflation = 7%

Hence, in this case, Actual inflation is greater than expected inflation, so "This would WORSEN the union and BENEFTIS Specific Automakers because the real wage increase would now be:

= Nominal wage - Actual inflation rate

= 7% - 6%

= 1%

This is an example of RE-DISTRIBUTIVE COST OF INFLATION.