Workers at a local mining company are paid 25.60 per hour, and ...

[tiffannnnyyyyyy]

Workers at a local mining company are paid 25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation.
 
  Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate.

Question 2

Refer to Table 9-2. Assume the market basket for the consumer price index has two products  bread and milk  with the following values in 2011 and 2016 for price and quantity: The Consumer Price Index for 2016 equals
 
  A) 118. B) 116. C) 86. D) 85.

[Tonny]

Answer to Question 1

If actual inflation is 3, a 3 increase in wages will allow workers to maintain their real wage. However, if inflation is higher than expected (5 instead of 3), the 3 increase in wages will reduce the real wage, and firms will hire more workers than they had planned. As a result, unemployment will fall.

Answer to Question 2

B