Question

**Suppose you're a union worker. Your union negotiates an
annual 3% increase in salary for you and your fellow union members
for the next three years. The expected annual inflation rate is
2%.**

**1. What is your real expected change in
salary?**

**2. Suppose expectations aren't met, and rather than the
price inflation increasing by 2% prices, price decrease by 2%
annually for the next three years. Assuming you remain employed are
you helped or hurt by this change? What is your real change in
salary now? Is your employer pleased or unhappy about this
outcome?**

Answer #1

Union negotiates an annual 3% increase in salary;

The expected annual inflation rate is 2%.

1.

Expected Real increase in salary = Nominal increase - inflation rate

so, real increase in salary = 3% - 2% = 1%

..

2. Suppose expectations aren't met, and rather than the price inflation increasing by 2% prices, price decrease by 2% annually for the next three years.

Therefore the real interest rate = 3% - (-2%) = 3% + 2% = 5%

Due to fall in prices we are benefited as our real increase in salary is now 5% which was previously 1%.

our employer is unhappy about this outcome as even the prices are falling he is paying more to his workers

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annual 3% increase in salary for you and your fellow union members
for the next three years. The expected annual inflation rate is
2%.
1. What is your real expected change in
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2. Suppose expectations aren't met, and rather than the
price inflation increasing by 2% prices, price decrease by 2%
annually for the next three years. Assuming you remain employed are
you helped or hurt by this change? What...

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