Answer and Explanation:
As we know that
Nominal interest rate = Real interest rate + inflation rate
where
Nominal interest rate is 5%
Real interest rate is 2%
So, the inflation rate is 3%
Now if the inflation rate is increased by 2%
So the new inflation rate is 4%
And, the nominal interest rate would remain the same i.e 5%
So, the real interest rate is
= 5% - 4%
= 1%
Since the interest rate declines that decreased the consumer purchasing power
Moreover, the increase in the inflation rate declines the workers real wages i.e purchasing power also falls
So if there is an increase in inflation than it would be harmful for the union and benefit Friendly Airlines as the real wage increased would be less or low