Author Question: Using the CPI to compensate workers for inflation is appropriate because, in the face of a change in ... (Read 66 times)

ss2343 · **on:** Jul 1, 2018

Using the CPI to compensate workers for inflation is appropriate because, in the face of a change in relative prices, people should be allowed to purchase the same bundle as they did before the price changes.

Indicate whether the statement is true or false

Question 2

Inflation over time necessarily makes consumers worse off.

Indicate whether the statement is true or false

karlss · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

False. This assumes that people would still prefer the original bundle. Because they are facing a new set of relative prices, compensating people so that they could purchase the original bundle will allow them to be able to achieve a higher level of utility than they did before the price changes.

Answer to Question 2

False. Wages also increase over time. Workers may earn the price of some goods in less time than in the past.