Indexing wages to inflation
A) increases the sensitivity of inflation to changes in the labor market.
B) reduces the sensitivity of inflation to changes in the labor market.
C) increases the sensitivity of inflation to outside price shocks.
D) a and c.
E) none of the above.

Question

Quizplus · Accepted Answer

Indexing wages to inflation means that wages adjust automatically in response to changes in the inflation rate. This can increase the sensitivity of inflation to changes in the labor market because as wages increase (in response to inflation), it can lead to higher spending power and potentially more demand-pull inflation. Additionally, it increases the sensitivity of inflation to outside price shocks because if an external factor causes prices to rise, indexed wages will also increase, potentially leading to a wage-price spiral.

Indexing Wages to Inflation