Suppose Specific Automakers is considering signing a long-term contract with the

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 lower than expected, coming in at 5%. This would the union and Specific Automakers because the real wage increase would now be This is an example of: The redistributive cost of inflation The resource cost of inflation

Explanation / Answer

Inflation is 5% which is lower than expected.

So this would benefit union and worsen automakers because real wage increase is( nominal -inflation) =9 - 5 =4%

This is an example of redistribuitve cost of inflation.

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