Suppose an Employer and Its Employees Enter into a Wage

question 89

Multiple Choice

Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%.But suppose that the price level rises by 3% over the course of the contract.In this case,

• A)the employees' purchasing power will rise.
• B)the employees' purchasing power will fall.
• C)the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady.
• D)both employer and employees will benefit from increased purchasing power.
• E)both employer and employees will experience a loss of purchasing power.

---

Definitions:

Real Capital

Physical assets like machinery, buildings, and infrastructure that are used in the production of goods and services.

Equilibrium Interest Rate

The interest rate at which the demand for money balances exactly equals the supply of money in circulation, leading to economic equilibrium.

Taxation

The process by which governments charge fees on individuals and corporations to fund public spending.

Loanable Funds

Refers to the market where savers supply funds for loans to borrowers.