Expected Inflation

Expected Inflation (π^E)

A company and its workers' union are negotiating a new contract. Both sides anticipate that the overall price level in the economy will increase by 5% over the next year. The company offers a 3% nominal wage increase. From a macroeconomic perspective, why is the union likely to reject this offer?

Real vs. Nominal Pricing Decision

The Illusion of a Pay Raise

Evaluating a Nominal Wage Policy

A firm provides a 3% nominal wage increase to its employees in a year where the overall price level increases by 5%. This action results in an increase in the firm's real labor costs.