Explain how an increase in expected inflation

Reference no: EM13177333

Assume that employers and workers agree that real wages should rise by 2% next year:

1) if inflation is expected to be 2% next year, what will happen to nominal wages next year?

2) If inflation is expected to be 4% next year, rather than 2%, what will happen to nominal wages next year?

3) Use your answers from parts 1 and 2 to explain how an increase in expected inflation will tend to affect the following year's actual rate of inflation.

Reference no: EM13177333

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