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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 percent 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.

Respuesta :

jepessoa

Answer:

The answer is: C) business cycles are less severe.

Explanation:

If the wages follow the general price level, it means that they will follow the inflation rate. When the economy is strong and inflation might rise, then the wages should increase accordingly. When the economy is starting to enter a recession then the inflation rate will reduce, so wages will not increase as much (if any increase at all).

This type of economic policy favors expansion cycles since private consumption is the main component of the GDP and also helps when the economy enters a recession because the wages will follow inflation rate which will help make the recession less severe and hopefully shorter.

One basic concept for this to work is that inflation is always a positive number, countries rarely (if ever) go through deflation processes.

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