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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?

To determine

Impact on output, price and employment due to link between minimum wage rate and CPI.

Explanation

As wages are linked to CPI, it means as Consumer price index increases, it leads to increase in wage rate also. CPI has been considerably increasing in recent times. Due to increase in index number, value of goods have increased, which implies increase in price level.

As the minimum wage rate is tied to CPI, an increase in CPI leads to increase in wage rate.

Wages are paid to workers, which is input cost for the producers. Due to increase in wage rate, Cost of production will increase leading to decrease in profit margins.

As profit margins are less, producers will be reluctant to employ more laborers at increasing wage rate...

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