Question

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 4 percent over the next year, which of the following will occur?
A. Unemployment of university employees will fall.
B. Real wages for university employees will rise.
C. Inflation will be 5 percent the following year.
D. The decrease in inflation is expected

Answer 1

Answer:

B. Real wages for university employees will rise.

Explanation:

Increase in income is @ 5%, and that the actual inflation is only 4% that is less than the increase in income. Accordingly, the company is paying more to the employees, and accordingly their wages have increased.

The amount of money available in real terms is more than the actual money, held by the employees earlier.

This is all because the actual increase in inflation rate is less than the increase in salary of employees.