When a long-term contract is indexed for inflation, then:
A) prices or wages in the contract are automatically adjusted periodically based on the inflation rate.
B) inflation has no impact on the nominal prices in the contract.
C) the quantity of sales is adjusted automatically by the percentage change in prices.
D) taxes are reduced to offset profit reductions due to inflation.

Question

Quizplus · Accepted Answer

Inflation indexing in a long-term contract means that the prices or wages specified in the contract are adjusted in line with changes in the inflation rate, ensuring that the real value of the amounts paid or received under the contract remains constant despite inflation.

When a Long-Term Contract Is Indexed for Inflation, Then