Inflation - Long-Term Wage and Price Contracts

7 important questions on Inflation - Long-Term Wage and Price Contracts

What do union wage contracts often do regarding pay rates?

They set pay rates for several years in advance.

What do supplier contracts for raw materials or parts do?

They may also lock in prices for years.

What do these contracts reflect when signed?

They show what people expect inflation will be over time.
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If inflation is expected at 3% a year, what might the contract include?

The contract may include a 3% annual wage or price increase.

Why can wages and prices not be changed quickly during the contract period?

Because these contracts are fixed, changes are not possible.

How does this affect inflation's rise or fall?

It slows down how fast inflation can rise or fall.

What effect does this stability have on inflation in the short run?

It makes inflation more stable in the short run.

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