WL-inflation

# WL-inflation - 1 Winners and losers from unexpected...

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Winners and losers from unexpected inflation Case 1: Wage contracts Consider the following scenario: (1)The time 1 CPI is =100. (2)At time 1 an employer and employee agree to a wage contract paying the worker a time 2 nominal wage of =\$10/labor. (3)Each party to the wage contract expects inflation from time 1 to time 2 to be 5%. That is, each party expects the time 2 CPI to be expected time 2 CPI= = 105. Defining the price level to be CPI/100, one finds that the time 2 expected price level is =1.05 (4)Given (2) and (3), it follows that each party to the contract expects the time 2 real wage to be: expected time 2 real wage = = / = \$10/(1.05) (≈\$9.53). (5) Actual inflation from time 1 to time 2 is 10%. So the actual CPI at time 2 is actual time 2 CPI = =110. The actual, realized price level is =1.10. (6)The actual real wage is actual time 2 real wage = / =\$10/(1.10) (≈\$9.10). (7)The worker has an unexpected loss of unexpected real loss =\$10/(1.05)- \$10/(1.10) ≈ \$0.43. The loss represents the difference between the

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## This note was uploaded on 12/09/2009 for the course ECON 2006 taught by Professor Rdcothren during the Spring '08 term at Virginia Tech.

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WL-inflation - 1 Winners and losers from unexpected...

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