Answer to Question #309967 in Macroeconomics for xyouwf_

Question

A newspaper article once reported that the U.S. economy was experiencing a low rate of

inflation. It said that “low inflation has a downside: 45 million recipients of Social Security and

other benefits will see their checks go up by just 2.8 percent next year.”

a. Why would policymakers link increases in Social Security and other benefits to inflation?

b. Is the small increase in benefits a “downside” of low inflation, as the article suggests?

Why or why not?

Answer 1

a)

Social security and several other kinds of benefits are indexed to inflation. This is the case since it help to secure the purchasing power of individual who receive these benefits. Increase in inflation rate will reduce the purchasing power of individual. The government should try to maintain the purchasing power of individuals by increasing amount of benefits so that they can consume at optimal consumption basket.

b)

No, it is not an down side.

A small increase in amount of benefits received following a low inflation rate makes the purchasing power of the individuals remain unchanged. However, if these small benefits are are more compared to the inflation rate, individuals' real income increases hence their purchasing powers also increase.