Question

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?

a) Increase in output, increase in price level, decrease in employment
b) Decrease in output, decrease in price level, increase in employment
c) Increase in output, decrease in price level, increase in employment
d) Decrease in output, increase in price level, decrease in employment

Answer 1

Tying the minimum wage to the consumer price index (CPI) can lead to a decrease in output, an increase in the price level, and a decrease in employment.

Step-by-step explanation:

The policy of tying the minimum wage to the consumer price index (CPI) is likely to have the following effects on output, the price level, and employment:

1. Decrease in output: By increasing wages, businesses may face higher production costs, which can lead to a decrease in output.
2. Decrease in price level: With higher wages, businesses may pass on the cost to consumers, resulting in an increase in prices. However, an increase in the minimum wage does not necessarily lead to a significant increase in the overall price level.
3. Increase in employment: Tying the minimum wage to the CPI may make it more difficult for businesses to afford hiring additional employees, leading to a decrease in employment opportunities.