The adjustment of nominal incomes to changes in the price level (CPI) is fixed because of the:
A) volatility of investment spending.
B) existence of long-term contracts.
C) complete information possessed by workers.
D) all of the above.

Question

Quizplus · Accepted Answer

The existence of long-term contracts, such as wage agreements, makes it difficult for nominal incomes to adjust to changes in the price level quickly. This is because the terms of these contracts are fixed over a set period of time, meaning that wages will not necessarily increase or decrease in response to changes in the CPI. While volatility in investment spending and complete information possessed by workers may also impact the adjustment of nominal incomes to changes in the price level, they are not the main reason for their fixed nature.

The Adjustment of Nominal Incomes to Changes in the Price