As the Proportion of Labour Contracts That Index Wages to Prices

question 58

Multiple Choice

As the proportion of labour contracts that index wages to prices declines, we would expect that:

• A) nominal wages will become more sensitive to changes in unemployment.
• B) an increase in the unemployment rate will now have a smaller effect on inflation.
• C) the natural rate of unemployment will decrease.
• D) the natural rate of unemployment will increase.
• E) an increase in the unemployment rate will now have a larger effect on inflation.

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Definitions:

Perfectly Competitive Market

A theoretical market structure characterized by an infinite number of small firms, identical products, and no barriers to entry or exit.

Vendors Sell

The act of offering goods or services to buyers in exchange for money or other forms of payment.

Long-run Equilibrium

A state in which all factors of production can vary, and economic agents have fully adjusted to any changes, leaving no incentive for further adjustments.

Perfectly Competitive Market

An economic market setup in which there are numerous buyers and sellers dealing in identical products with no obstacles for entering or leaving the market.