Suppose an economy has a law that requires all wages to be adjusted quarterly to reflect changes in the general price level.This means wages either increase or decrease depending on the percent change in the general price level.In this economy
A) there are recessions but no expansions.
B) output is always at the full-employment level.
C) business cycles are less severe.
D) the price level will remain fixed.
E) workers are worse off in real terms than if wages were not indexed.

Question

Quizplus · Accepted Answer

By adjusting wages quarterly to reflect changes in the general price level, this economy is able to reduce the severity of business cycles. When the economy is experiencing inflation, wages will increase to keep up with the rising prices, but when the economy is experiencing deflation, wages will decrease. This helps to stabilize the economy and reduce the amplitude of the business cycle. However, it is important to note that workers may be worse off in real terms if wages are indexed, as they may not see increases in their purchasing power if the price level is rising faster than their wages.

Suppose an Economy Has a Law That Requires All Wages