What happens to workers who contract for cost of living allowances of 10% a year when the inflation rate falls to 4%?
A) They lose purchasing power.
B) They are paying an inflation tax.
C) They become more costly to employ and may lose their jobs.
D) They must be suffering from money illusion.

Question

Quizplus · Accepted Answer

When the inflation rate falls to 4% but workers have contracts for cost of living allowances of 10% a year, their wages increase by more than the inflation rate. This makes them more expensive for employers, potentially leading to job losses if employers decide to cut costs.

What Happens to Workers Who Contract for Cost of Living