Question

In: Economics

Explain whether the given statement is true, false or uncertain. Start your answer by selecting one...

Explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any.

Question: Workers and employers in economy expected 3% inflation rate for 2015 but actual inflation turns out to be 5%. Kylie, a casual worker with no labour contract, has remained unaffected while Susie, a fixed term employee, has become worse-off.

Ans:

Solutions

Expert Solution

True.

Kylie (casual worker) is unaffected but Susie (permanent worker) is worse off.

Assumptions made:

1. Casual workers have no long-standing contract. Terms of work change frequently for them as they keep switching jobs.

2. Fixed-term workers work under predetermined contracts.

3. Nominal wages of casual workers take into consideration current inflation.

4. Nominal wages of permanent workers take into consideration expected inflation.

Argument:

When Susie's wage was fixed earlier, expected inflation was 3%. However, actual inflation is 5%. So, her nominal wage must have accomodated for 3% inflation. However, inflation of 5% reduces her real wage as her nominal wages don't compensate for the higher inflation.

On the other hand, Kylie's wage will be fixed taking into consideration the 5% inflation as she is a casual worker and her wage will be fixed every time she is hired on the casual basis. Thus, expectations of inflation don't play a role for her wages. So, she is unaffected by wrong inflation estimate.

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Rahul Sunny answered 1 year ago
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