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By the end of this section, you will be able to:

  • Explain the relationship between indexing and inflation
  • Identify three ways the government can control inflation through macroeconomic policy

When a price, wage, or interest rate is adjusted automatically with inflation, it is said to be indexed    . An indexed payment increases according to the index number that measures inflation. A wide array of indexing arrangements is observed in private markets and government programs. Since the negative effects of inflation depend in large part on having inflation unexpectedly affect one part of the economy but not another—say, increasing the prices that people pay but not the wages that workers receive—indexing will take some of the sting out of inflation.

Indexing in private markets

In the 1970s and 1980s, labor unions commonly negotiated wage contracts that had cost-of-living adjustments (COLAs)    which guaranteed that their wages would keep up with inflation. These contracts were sometimes written as, for example, COLA plus 3%. Thus, if inflation was 5%, the wage increase would automatically be 8%, but if inflation rose to 9%, the wage increase would automatically be 12%. COLAs are a form of indexing applied to wages.

Loans often have built-in inflation adjustments, too, so that if the inflation rate rises by two percentage points, then the interest rate charged on the loan rises by two percentage points as well. An adjustable-rate mortgage (ARM)    is a kind of loan used to purchase a home in which the interest rate varies with the rate of inflation. Often, a borrower will be able receive a lower interest rate if borrowing with an ARM, compared to a fixed-rate loan. The reason is that with an ARM, the lender is protected against the risk that higher inflation will reduce the real loan payments, and so the risk premium part of the interest rate can be correspondingly lower.

A number of ongoing or long-term business contracts also have provisions that prices will be adjusted automatically according to inflation. Sellers like such contracts because they are not locked into a low nominal selling price if inflation turns out higher than expected; buyers like such contracts because they are not locked into a high buying price if inflation turns out to be lower than expected. A contract with automatic adjustments for inflation in effect agrees on a real price to be paid, rather than a nominal price.

Indexing in government programs

Many government programs are indexed to inflation. The U.S. income tax code is designed so that as a person’s income rises above certain levels, the tax rate on the marginal income earned rises as well; this is what is meant by the expression “move into a higher tax bracket.” For example, according to the basic tax tables from the Internal Revenue Service, in 2014 a single person owed 10% of all taxable income from $0 to $9,075; 15% of all income from $9,076 to $36,900; 25% of all taxable income from $36,901 to $89,350; 28% of all taxable income from $89,351 to $186,350; 33% of all taxable income from $186,351 to $405,100; 35% of all taxable income from $405,101 to $406,750; and 39.6% of all income from $406,751 and above.

Questions & Answers

can someone help me with some logarithmic and exponential equations.
Jeffrey Reply
sure. what is your question?
ninjadapaul
20/(×-6^2)
Salomon
okay, so you have 6 raised to the power of 2. what is that part of your answer
ninjadapaul
I don't understand what the A with approx sign and the boxed x mean
ninjadapaul
it think it's written 20/(X-6)^2 so it's 20 divided by X-6 squared
Salomon
I'm not sure why it wrote it the other way
Salomon
I got X =-6
Salomon
ok. so take the square root of both sides, now you have plus or minus the square root of 20= x-6
ninjadapaul
oops. ignore that.
ninjadapaul
so you not have an equal sign anywhere in the original equation?
ninjadapaul
Commplementary angles
Idrissa Reply
hello
Sherica
im all ears I need to learn
Sherica
right! what he said ⤴⤴⤴
Tamia
what is a good calculator for all algebra; would a Casio fx 260 work with all algebra equations? please name the cheapest, thanks.
Kevin Reply
a perfect square v²+2v+_
Dearan Reply
kkk nice
Abdirahman Reply
algebra 2 Inequalities:If equation 2 = 0 it is an open set?
Kim Reply
or infinite solutions?
Kim
The answer is neither. The function, 2 = 0 cannot exist. Hence, the function is undefined.
Al
y=10×
Embra Reply
if |A| not equal to 0 and order of A is n prove that adj (adj A = |A|
Nancy Reply
rolling four fair dice and getting an even number an all four dice
ramon Reply
Kristine 2*2*2=8
Bridget Reply
Differences Between Laspeyres and Paasche Indices
Emedobi Reply
No. 7x -4y is simplified from 4x + (3y + 3x) -7y
Mary Reply
is it 3×y ?
Joan Reply
J, combine like terms 7x-4y
Bridget Reply
im not good at math so would this help me
Rachael Reply
yes
Asali
I'm not good at math so would you help me
Samantha
what is the problem that i will help you to self with?
Asali
how do you translate this in Algebraic Expressions
linda Reply
Need to simplify the expresin. 3/7 (x+y)-1/7 (x-1)=
Crystal Reply
. After 3 months on a diet, Lisa had lost 12% of her original weight. She lost 21 pounds. What was Lisa's original weight?
Chris Reply
what's the easiest and fastest way to the synthesize AgNP?
Damian Reply
China
Cied
types of nano material
abeetha Reply
I start with an easy one. carbon nanotubes woven into a long filament like a string
Porter
many many of nanotubes
Porter
what is the k.e before it land
Yasmin
what is the function of carbon nanotubes?
Cesar
what is nanomaterials​ and their applications of sensors.
Ramkumar Reply
what is nano technology
Sravani Reply
what is system testing?
AMJAD
preparation of nanomaterial
Victor Reply
Yes, Nanotechnology has a very fast field of applications and their is always something new to do with it...
Himanshu Reply
good afternoon madam
AMJAD
what is system testing
AMJAD
what is the application of nanotechnology?
Stotaw
In this morden time nanotechnology used in many field . 1-Electronics-manufacturad IC ,RAM,MRAM,solar panel etc 2-Helth and Medical-Nanomedicine,Drug Dilivery for cancer treatment etc 3- Atomobile -MEMS, Coating on car etc. and may other field for details you can check at Google
Azam
anybody can imagine what will be happen after 100 years from now in nano tech world
Prasenjit
after 100 year this will be not nanotechnology maybe this technology name will be change . maybe aftet 100 year . we work on electron lable practically about its properties and behaviour by the different instruments
Azam
name doesn't matter , whatever it will be change... I'm taking about effect on circumstances of the microscopic world
Prasenjit
how hard could it be to apply nanotechnology against viral infections such HIV or Ebola?
Damian
silver nanoparticles could handle the job?
Damian
not now but maybe in future only AgNP maybe any other nanomaterials
Azam
can nanotechnology change the direction of the face of the world
Prasenjit Reply
At high concentrations (>0.01 M), the relation between absorptivity coefficient and absorbance is no longer linear. This is due to the electrostatic interactions between the quantum dots in close proximity. If the concentration of the solution is high, another effect that is seen is the scattering of light from the large number of quantum dots. This assumption only works at low concentrations of the analyte. Presence of stray light.
Ali Reply
the Beer law works very well for dilute solutions but fails for very high concentrations. why?
bamidele Reply
how did you get the value of 2000N.What calculations are needed to arrive at it
Smarajit Reply
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Source:  OpenStax, Principles of macroeconomics for ap® courses. OpenStax CNX. Aug 24, 2015 Download for free at http://legacy.cnx.org/content/col11864/1.2
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