Question

In: Economics

If workers and employers agree to a three-year wage contract expecting 3% inflation and inflation turns...

If workers and employers agree to a three-year wage contract expecting 3% inflation and inflation turns out to be 5%, then:

a) workers gain and employers gain

b) workers gain and employers lose

c) workers lose and employers gain

d) workers lose and employers lose

Please explain why and who are the lenders and borrowers in this case.?

Solutions

Expert Solution

A 3 year wage contract means the same wage will be given to the worker by the employer for 3 years.

When the inflation rate increases, every unit of money now is worth less.

Given worker gets the same amount, he is worse off as his purchasing power falls and employers are better off as they have to pay comparatively less.

c) Workers lose and employers gain.

Therefore, here it is not a concept of lender and borrower.

Rahul Sunny answered 2 years ago
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