4. The effects of inflation Suppose Specific Automakers is considering signing a long-term contract with the union representing its workers. Specific Automakers 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 higher than expected, coming in at 7%. This would the union and Specific Automakers because the real wage increase would now be .

This would WORSEN the union and BENEFITS Specific Automakers because the real wage increase would now be 2%

Explanation:

Specific Automakers is considering signing a long-term contract with the union representing its workers.

Real wages should increase by 3%

Expected inflation is 6%

Nominal wage increase is 9%

Actual inflation = 7%

Since actual inflation is greater than expected inflation, this would WORSEN the union and it is only of benefits to the automakers because this now makes real wage increase to be as calculated below leading to a redistributive cost of inflation.

= Nominal wage - Actual inflation rate

= 9% - 7%

= 2%

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