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Chapter 22: Q 29. (page 553)

If, over time, wages and salaries on the average rise at least as fast as inflation, why do people worry about how inflation affects incomes?

Short Answer

Expert verified

Because of the stickiness of wages, this happens.

Step by step solution

01

Step 1. Definition

Inflation is a situation in an economy when the average prices of all the goods and services increased because of some market pressures.

02

Step 2. Explanation

This happens because the change in income is fast as compared to a change in wages, as wages will not change immediately but income changes immediately. As wages are sticky and will take time to adjust with inflation but the household income falls frequently as the inflation rises because of the reduced purchasing power.

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Most popular questions from this chapter

Why does “substitution bias” arise if we calculate the inflation rate based on a fixed basket of goods?

Edna is living in a retirement home where most of her needs are taken care of, but she has some discretionary spending. Based on the basket of goods in Table 9.5, by what percentage does Edna’s cost of living increase between time 1and time 2?

What has been a typical range of inflation in the U.S. economy in the last decade or so?

If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:

a. A union member with a COLA wage contract

b. Someone with a large stash of cash in a safe deposit box

c. A bank lending money at a fixed rate of interest

d. A person who is not due to receive a pay raise for another 11 months

What is the difference between the price level and the rate of inflation?
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