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Attempts Average / 2 5. The effects of inflation SupposeLake End Bus Transport is considering signing a long-term contract with the union representing its bus drivers. Lake End Bus Transport and the union both agree that real wages should increase by 4%. Inflation is expected to be 7%, so they agree on a 10% nominal wage increase. Now, suppose inflation turns out to be higher than expected, coming in at 8%. This would * the union and 7 a vo Lake End Bus Transport 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: Variable inflation is associated with high transaction costs Inflation harms lenders and helps borrowers Inflation obscures relative price changes