If the anticipated rate of inflation is 5% and workers agree to a wage increase of 4%, if the anticipated rate occurs, then nominal wages will:
A)fall by 1%.
B)rise by 4%.
C)rise by 5%.
D)fall by 5%.

Question

Quizplus · Accepted Answer

If the anticipated rate of inflation is 5%, this means that prices are expected to increase by 5%. If workers agree to a wage increase of 4%, then their nominal wages will increase by that amount. Given that the rate of inflation and the wage increase are different, we cannot simply add or subtract them to determine the change in nominal wages. However, we can say that if workers receive a 4% wage increase and prices increase by 5%, then workers' purchasing power will decrease slightly. Therefore, nominal wages will rise by 4%.

If the Anticipated Rate of Inflation Is 5% and Workers