If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected,
A) The interest rate will fall
B) Workers will gain at the expense of firms.
C) Neither workers nor firms will gain because the increase in wages is fixed in the labour agreement.
D) Firms will gain at the expense of workers.

Question

Quizplus · Accepted Answer

If inflation is higher than expected, the real wage (purchasing power of wages) decreases, benefiting firms as they pay less in real terms, while workers lose purchasing power.

If Workers and Firms Agree on an Increase in Wages