A worker has negotiated a nominal wage contract with his employer for a period of 3 years.Which of the following will happen if the rate of inflation rises beyond the worker's expectations during this period?
A) The worker will be better off.
B) The worker will be worse off.
C) The worker's real wage will increase.
D) The company's shareholders will be worse off.

Question

Quizplus · Accepted Answer

If the rate of inflation rises beyond the worker's expectations, the cost of living will increase faster than the nominal wage, which means the real wage (purchasing power) of the worker will decrease, making the worker worse off. The nominal wage contract remains fixed, so the worker cannot negotiate higher wages to keep up with inflation. The increase in the cost of production due to inflation may also lead to a decrease in profits, which may affect the shareholders, but this is not necessarily the case as the company may have other means to offset these costs.

A Worker Has Negotiated a Nominal Wage Contract with His