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    Question

      If the wage contracts gets better indexed with the prices, what will happen to the effect of unemployment on inflation?

    A It reduces the effect of unemployment Correct Answer Incorrect Answer
    B It increases the effect of unemployment Correct Answer Incorrect Answer
    C It remains same Correct Answer Incorrect Answer
    D Unemployment doesn’t effect inflation Correct Answer Incorrect Answer

    Solution

    Without wage indexation, lower unemployment increases wages which in turn increases price. If there is wage indexation, then this increase in price will further increase the wages which then again increase the price. This will lead to second round effect on inflation. Thus inflation increases further.

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