Business, 05.07.2020 14:01 djs1002

Suppose Friendly Airlines is considering signing a long-term contract with the union representing its pilots. Friendly Airlines 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 Friendly Airlines because the real wage increase would now be . Because of uncertainty about future inflation, the union devotes a large quantity of resources to monitoring inflation indicators in order to maximize its financial position. This illustrates the fact that: Inflation harms lenders and helps borrowers Inflation obscures relative price changes Variable inflation is associated with high transaction costs

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Suppose Friendly Airlines is considering signing a long-term contract with the union representing it...

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