Question

6. The effects of inflation Suppose Friendly Airlines is considering signing a long-term contract with the union representing its pilots. Friendly Airlines and the union both agree that real wages should increase by 3%. Inflation is expected to be 6%, so they agree on a 9% nominal wage increase. Now, suppose inflation turns out to be lower than expected, coming in at 5%. This would the union and Friendly Airlines because the real wage increase would now be .

Answer 1

If inflation is lower than expected, it would benefit the union and it would be a disadvantage to Friendly Airlines because the real wage increase would now be 4%.

What is inflation?

Inflation is when there is a general increase in the general price level of an economy. If inflation turns out to be lower than expected, the employers would be at a disadvantage while the employees would be at advantage because there would be an increase in their real wages.

Increase in real wage = real increase in wage + (expected inflation + actual inflation)

3% + (6% - 5%) = 4%

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