Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%.But suppose that the price level rises by 3% over the course of the contract.In this case,
A)the employees' purchasing power will rise.
B)the employees' purchasing power will fall.
C)the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady.
D)both employer and employees will benefit from increased purchasing power.
E)both employer and employees will experience a loss of purchasing power.

Question

Quizplus · Accepted Answer

When the price level rises by 3% and the wage contract specifies only a 2% increase, the employees' purchasing power will fall. The increase in prices means that the employees will have to spend more to purchase the same goods and services, but their wages will not have increased enough to keep up with the increase in prices.

Suppose an Employer and Its Employees Enter into a Wage