Suppose workers negotiate for a 5 percent nominal wage increase and expect a 1 percent inflation rate. If the actual inflation rate is 6 percent, then workers
A) and firms are both better off.
B) are better off and firms are worse off.
C) are worse off and firms are better off.
D) and firms are both worse off.

Question

Quizplus · Accepted Answer

Since workers negotiated for a 5 percent nominal wage increase, they expected their wage increase to outpace inflation by 4 percent (5% - 1%). However, if the actual inflation rate is 6 percent, then the real wage increase is only 5 percent - 6 percent = -1 percent. Therefore, the workers are worse off than they expected. On the other hand, firms are better off because they only have to pay a 5 percent nominal wage increase instead of a 6 percent increase.

Suppose Workers Negotiate for a 5 Percent Nominal Wage Increase