CFA Practice Question

CFA Practice Question

If unions overestimate the rate of inflation, and integrate this expectation in their bargaining with employers, the real wage will ______ and the unemployment will ______.
A. increase, increase.
B. increase, decrease.
C. decrease, increase.
Explanation: If people expect higher inflation than actual one, the employer will reduce output level due to higher resource prices (higher wages). This will increase unemployment rate. Since the higher inflation expectation is reflected in their wages, their real wage will be higher. The result is less people are employed but making higher real wages.

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