People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully
What will be an ideal response?
If inflation and income grow at the same rate, real income will be constant as inflation increases both total expenditures and total income by the same amount. All of the money that a business receives on the sale of its product must be paid out as income to the owners of the factors of production. If the prices of final goods and services increase (inflation), then there is more money for the businesses to pay out as income. Therefore, on average, the buying power of income will remain constant. The complaint is not valid.
You might also like to view...
What is meant by inflation targeting? Does the Fed engage in inflation targeting?
What will be an ideal response?
If a perfectly competitive firm's total revenue is less than its total variable cost, the firm
A) should raise its price above its average variable cost. B) should continue to produce and increase its demand. C) should stop production by shutting down temporarily. D) should adopt new technology in order to lower its costs of production.