Employees at the university have negotiated a 5 percent increase in wages for the next year,based on their inflation expectations.If inflation is actually 6 percent over the next year,which of the following will occur?

Question

Quizplus · Accepted Answer

The negotiated wage increase of 5 percent is based on the employees' inflation expectations, meaning they expect inflation to be around 5 percent. However, if inflation turns out to be 6 percent, then the real wages for university employees will actually decrease by 1 percent (6% inflation minus 5% wage increase). This is because their wages will not be able to keep up with the increase in prices. Unemployment, inflation the following year, and the expected increase in inflation are not directly related to the situation described in the question.

Employees at the University Have Negotiated a 5 Percent Increase