When a price, wage, or interest rate is adjusted automatically with inflation, it is said to be __. a. indexed b. nominally adjusted c. semi-indexed d. seasonally adjusted
The correct answer and explanation is:
The correct answer is a. indexed.
When a price, wage, or interest rate is automatically adjusted to reflect inflation, it is described as being “indexed.” Indexing is a method used to adjust certain economic variables in order to keep pace with changes in the price level, commonly measured by inflation. This is typically done through a linkage to an inflation index, such as the Consumer Price Index (CPI).
For example, wages in some contracts or government benefits like Social Security in the U.S. are indexed to inflation, ensuring that the purchasing power of the income does not decrease over time as prices increase. Similarly, some interest rates, such as adjustable-rate mortgages (ARMs), are also indexed to inflation or a specific price index, so that borrowers and lenders adjust their rates in response to inflationary changes.
The purpose of indexing is to maintain the real value of payments, ensuring that the amount of money received or paid is not eroded by rising prices. This method helps to stabilize the economy by preventing income or asset value loss due to inflation, which can distort economic decision-making if not adjusted.
This automatic adjustment contrasts with nominal adjustments, where figures are set without considering inflation. A semi-indexed adjustment may involve only partial or conditional indexing, and seasonal adjustments are made to account for regular seasonal variations in certain economic activities (like agricultural production) but are not related to inflation. Therefore, indexing is the most accurate term for automatic inflation adjustments.