If workers and employers expecting three per cent inflation agree to a three-year wage contract, and inflation turns out to be five per cent, then:

Question

Quizplus · Accepted Answer

When inflation is higher than expected, workers' real wages (purchasing power) decrease because their nominal wage increases do not keep up with the higher prices of goods and services. Employers gain because they can sell their products at higher prices while paying workers wages that were agreed upon before the inflation rate increased.

If Workers and Employers Expecting Three Per Cent Inflation Agree