If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected ?
Correct answer: D. firms will gain at the expense of workers.
- A. none of these answers
- B. Workers will gain at the expense of firms
- C. neither workers nor firms will gain because the increase in wages in fixed in the labor agreement
- D. firms will gain at the expense of workers.
Explanation
When actual inflation exceeds the rate built into the wage agreement, workers' real wages are lower than expected while firms pay the agreed nominal wages. Thus, firms gain at the expense of workers.
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