ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The real income of people will increase
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There will be no change
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The real income of people will decrease
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People will have more purchasing power
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Detailed explanation-1: -As inflation increases, investment falls, and the capital stock declines decline over time. While consumption may decline as well, this has no direct bearing on capital accumulation. The declining capital stock reduces GDP and makes labor less productive. Therefore, labor demand declines and real wages fall.
Detailed explanation-2: -Most real income calculations are based on inflation reported by the Consumer Price Index (CPI). Theoretically, when inflation is rising, real income and purchasing power fall by the amount of inflation on a per-dollar basis.
Detailed explanation-3: -An increase in the price level is matched by an increase in the nominal wage, and nothing changes in terms of the real wage or the real equilibrium quantity of labor. If there is 10 percent inflation, the price level increases from 1 to 1.1, the real wage is unchanged, and the nominal wage increases by 10 percent.
Detailed explanation-4: -If wages are raised under the pressure of trade unions to meet the higher cost of living, the spending by the workers will increase. But, if the supply of goods does not increase proportionately, the prices will rise. This type of inflation is called wage-induced inflation.