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.