The effects of inflation Suppose Friendly Airlines is considering signing a long-term contract with the union representing its pilots. Friendly Airlines and the union both agree that real wages should increase by 2%. Inflation is expected to be 3%, so they agree on a 5% nominal wage increase. Now, suppose inflation turns out to be lower than expected, coming in at 2%. This would the union and Friendly Airlines because the real wage increase would now be .
Because of uncertainty about future inflation, the union devotes a large quantity of resources to monitoring inflation indicators in order to maximize its financial position. This illustrates the fact that:
A. Inflation harms lenders and helps borrowers
B. Variable inflation is associated with high transaction costs
C. Inflation obscures relative price changes

The lower than expected inflation would benefit the union and not benefit Friendly Airlines.

B. Variable inflation is associated with high transaction costs

Explanation:

Inflation is a persistent rise in the general price levels.

It was expected that inflation would increase by 3% and because of that expectation, wages were increased by 5%.

As it turns out, inflation only increased by 2%. If employers were aware that inflation would increase by only 2%, the increase in income would have been 4%.

As a result of this, the company ends up paying more to workers and workers and up earning more. So, the union benefits while the airline is at a disadvantage.

Because of the uncertainty of inflation, the union dedicates high amount of resources to monitor its movements. This shows that there is a high cost associated with the uncertainty of inflation.

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answer makes less frequent trips to the bank and firms make less frequent price changes;