Gordon suggests that full indexation of production costs to nominal AD would solve the macroeconomic externality.However,individual firms would be unlikely to extend full indexation to their workers because
A)its local customers may not buy its products at the new price level.
B)its suppliers may reside in foreign countries and are therefore,not subject to indexation.
C)other competitor firms will not index their wages.
D)All of the above.

Question

Quizplus · Accepted Answer

Gordon's suggestion of full indexation of production costs to nominal Aggregate Demand (AD) aims to adjust costs in line with inflation to mitigate macroeconomic externalities. However, individual firms might resist extending full indexation to their workers for several reasons: A) Indexation could lead to higher product prices, potentially reducing local customer purchases. B) Suppliers from foreign countries might not follow the same indexation, affecting cost structures. C) If competitor firms do not index their wages, a firm that does could face competitive disadvantages due to higher labor costs. Thus, all the given reasons contribute to why firms might be unlikely to adopt full indexation for their workers.

Gordon Suggests That Full Indexation of Production Costs to Nominal