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 2%. inflation is expected to be 5%, so they agree on a 7% nominal wage increase. now, suppose inflation turns out to be higher than expected, coming in at 6%. this would the union and specific automakers because the real wage increase would now be

Worsen; benefits

Explanation:

Specific Automakers is signing a long term contract with the union who are the representative of workers.

Real wages should increase by = 2%

Expected inflation = 5%

Nominal wage increase = 7%

Actual inflation = 6%

Actual inflation is greater than expected inflation, so this would worsen the union and it is beneficial for the automakers because now real wage increase is only:

= Nominal wage - Actual inflation rate

= 7% - 6%

= 1%

This is an example of re-distributive cost of inflation.

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