Suppose a local union has a contract that calls for the nominal wage to increase by 5 percent plus 100 percent of any increase in the CPI.If the CPI increases by 4% and there is a 1% positive bias in the inflation rate,by how much would nominal wages unnecessarily increase?
A) 9 percent
B) 1 percent
C) 5 percent
D) 3 percent
E) 4 percent

Question

Suppose a local union has a contract that calls for the nominal wage to increase by 5 percent plus 100 percent of any increase in the CPI.If the CPI increases by 4% and there is a 1% positive bias in the inflation rate,by how much would nominal wages unnecessarily increase?
A) 9 percent
B) 1 percent
C) 5 percent
D) 3 percent
E) 4 percent

Quizplus · Accepted Answer

The 1% positive bias in the inflation rate means the CPI increase is overstated by 1%. Therefore, the actual CPI increase is 3%, not 4%. The contract calls for a wage increase of 5% plus the CPI increase. With the bias, wages increase by 9% (5% + 4%), but without the bias, they should increase by 8% (5% + 3%). Thus, wages unnecessarily increase by 1%.

Suppose a Local Union Has a Contract That Calls for the Nominal