Problem 16 Can a person believe that wages ... [FREE SOLUTION]

Chapter 10: Problem 16

Can a person believe that wages are inflexible downward for, say, one year and also believe in a self-regulating economy? Explain your answer.

Short Answer

Expert verified

Yes, a person could believe in both downward wage inflexibility and a self-regulating economy if they perceive these phenomena to occur on different time scales - inflexibility in the short term and self-regulation in the longer term.

Step by step solution

Define the concepts

Downward wage inflexibility means a situation where employers resist or cannot decrease their employees' wages due to various reasons. This can be the result of union contracts, laws, or concerns about morale and productivity. A self-regulating economy is a concept where market forces are allowed to function freely without significant government intervention. The adjustments necessary to achieve equilibrium, such as changing prices, including wages, are expected to occur naturally.

Examine the compatibility of held beliefs

Believing in the idea of downward wage inflexibility means accepting that wages may resist decreases even when economic conditions suggest that they should fall. If one also believes in a self-regulating economy, they concede that prices and wages can adjust without interference to maintain market equilibrium. Therefore, these two beliefs appear incompatible on the surface.

Consider potential reconciliations

However, one could argue that the self-regulating mechanism of the economy doesn't imply instant adjustment, and the wage inflexibility can disappear over a more extended period. Thus, a person might hold both beliefs if they think that wage inflexibility is a short-run phenomenon and the self-regulation occurs in the long-run.