Question

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 2%. Inflation is expected to be 5%, so they agree on a 7% nominal wage increase. Now, suppose inflation turns out to be higher than expected, coming in at 6%. This would the union and Friendly Airlines because the real wage increase would now be . Because of uncertainty about future inflation, the union devotes a large quantity of resources to monitoring inflation indicators in order to maximize its financial position. This illustrates the fact that: Inflation harms lenders and helps borrowers Inflation obscures relative price changes Variable inflation is associated with high transaction costs

Answer 1

Answer:

It would harm the union and benefit the Friendly Airlines

Lower

high transaction costs

Explanation:

Inflation is the persisistent rise in general price level.

The total increase in income is 7% due to a 2% increase in real income and an expectation of 5% inflation.

Instead, if inflation turn out to b 6%. Increase income ought to be 8% and not 7%.

Hence the union losses and the company gains because they would be paying less than they ought to pay.

Real wages is lower as a result

I hope my answer helps you.