Question

The effects of inflation

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 lower than expected, coming in at 5%. This would the _______union and _______ Specific Automakers because the real wage increase would now be _______.
Because of uncertainty about future inflation, the union devotes a large quantity of resources to monitoring inflation indicators in order to maximize its financial position.
This illustrates the fact that:
A. Inflation harms lenders and helps borrowers
B. Inflation obscures relative price changes
C. Variable inflation is associated with high transaction costs

Answer 1

Benefit

Harm

Higher

C. Variable inflation is associated with high transaction costs

Step-by-step explanation:

Inflation is a persistent rise in general price levels.

The increase in income was 9% based on the assumption that inflation would be 6%.

It turns out that inflation was 5%. The increase in income should have been 8% instead of 9%.

The union members end up earning more than they ought to, so they benefit. The company pays more than they ought to to workers, so they are in a disadvantage.

The union members spend a lot to monitor inflation. This is a transaction cost .

I hope my answer helps you