If wages and prices were fully indexed,
A)there would be less inflation following an adverse supply shock
B)inflation could always be perfectly anticipated
C)inflation arising from money expansion could be prevented
D)the economy would have difficulty adjusting to supply shocks since real wages could not adjust easily
E)politicians would be more likely to fight inflation vigorously

Question

Quizplus · Accepted Answer

If wages and prices are fully indexed, they automatically adjust to changes in the price level, making it difficult for real wages to adjust to supply shocks, as nominal wages would rise with prices, preventing the necessary real wage adjustments.

If Wages and Prices Were Fully Indexed