Assume contracts between workers and employers that call for an increase in the wage rate of 5 percent are based on an expected inflation rate of 3 percent.Should inflation actually be 6 percent, then
A)nominal wages fall by 5 percent.
B)real wages fall by 6 percent.
C)nominal wages fall by 1 percent.
D)real wages fall by 1 percent.

Question

Quizplus · Accepted Answer

Real wages fall by 1 percent because the actual inflation rate (6%) is 3% higher than the expected rate (3%), reducing the purchasing power of the 5% nominal wage increase by 1%.

Assume Contracts Between Workers and Employers That Call for an Increase