Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%.But suppose the price level rises by 3% over the course of the contract.In this case,
A)the employees' purchasing power will rise.
B)the employees' purchasing power will fall.
C)the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady.
D)both employer and employees will benefit from increased purchasing power.
E)both employer and employees will experience a loss of purchasing power.

Question

Quizplus · Accepted Answer

The wage increase of 2% is lower than the increase in prices of 3%, therefore the employees' purchasing power will decrease as they will not be able to afford as much with their wage increase as they could before the price level rise. The employer may still benefit from increased profits due to the higher prices, but this does not translate to increased purchasing power.

Suppose an Employer and Its Employees Enter into a Wage