Question

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 2%. Inflation is expected to be 3%, so they agree on a 5% nominal wage increase.
Now, suppose inflation turns out to be lower than expected, coming in at 2%. 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:______
A. Inflation harms lenders and helps borrowers
B. Variable inflation is associated with high transaction costs
C. Inflation obscures relative price changes

Answer 1

Answer:

The lower than expected inflation would benefit the union and not benefit Friendly Airlines.

B. Variable inflation is associated with high transaction costs

Explanation:

Inflation is a persistent rise in the general price levels.

It was expected that inflation would increase by 3% and because of that expectation, wages were increased by 5%.

As it turns out, inflation only increased by 2%. If employers were aware that inflation would increase by only 2%, the increase in income would have been 4%.

As a result of this, the company ends up paying more to workers and workers and up earning more. So, the union benefits while the airline is at a disadvantage.

Because of the uncertainty of inflation, the union dedicates high amount of resources to monitor its movements. This shows that there is a high cost associated with the uncertainty of inflation.

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