Suppose an economy has a law that requires all wages to be adjusted quarterly to reflect changes in the general price level.This means wages either increase or decrease depending on the percentage change in the general price level.In this economy:
A) there are recessions but no expansions.
B) output is always at the full employment level.
C) business cycles are less severe.
D) the price level will remain fixed.
E) workers are worse off in real terms than if wages were not indexed.

Question

Quizplus · Accepted Answer

Indexing wages to the price level can help stabilize the economy by reducing the severity of business cycles. Since wages adjust to changes in the price level, it helps to maintain real wages for workers and reduces the need for employers to lay off workers during downturns. This helps to avoid large swings in employment and output that often occur during normal business cycles. However, it does not guarantee full employment or a fixed price level, nor does it necessarily make workers worse off in real terms compared to not indexing wages.

Suppose an Economy Has a Law That Requires All Wages