When a payment is indexed to inflation and the price index understates inflation,
A) the real payment decreases over time
B) the real payment increases over time
C) the nominal payment decreases over time
D) in unemployment rate will increase
E) the level of unemployment will increase

Question

Quizplus · Accepted Answer

If the price index understates inflation, then the real rate of inflation is higher than the indexed rate. This means that the purchasing power of the indexed payment decreases over time because the real value of the payment is eroded by a higher inflation rate than what it's indexed to.

When a Payment Is Indexed to Inflation and the Price