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

Question

Quizplus · Accepted Answer

The wage increase of 2 percent will not keep up with the rise in the price level of 3 percent, meaning that the employees' purchasing power will fall. The employer may not necessarily experience a fall in purchasing power, but they will not benefit from increased purchasing power either. Therefore, option C is the best choice.

Suppose an Employer and Its Employees Enter into a Wage