Principles of Economics- Mankiw (5th) 506

Principles of Economics- Mankiw (5th) 506 - 522 PA R T E I...

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522 PART EIGHT THE DATA OF MACROECONOMICS For example, many long-term contracts between firms and unions include partial or complete indexation of the wage to the consumer price index. Such a provision is called a cost-of-living allowance, or COLA. A COLA automatically raises the wage when the consumer price index rises. Indexation is also a feature of many laws. Social Security benefits, for example, are adjusted every year to compensate the elderly for increases in prices. The brackets of the federal income tax—the income levels at which the tax rates change—are also indexed for inflation. There are, however, many ways in which the tax system is not indexed for inflation, even when perhaps it should be. We discuss these issues more fully when we discuss the costs of inflation later in this book. REAL AND NOMINAL INTEREST RATES Correcting economic variables for the effects of inflation is particularly important, and somewhat tricky, when we look at data on interest rates. When you deposit
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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