Once consumers recognize that a period of inflation has begun, there is generally an increase in consumer spending. T...

#JW September 22, 2019

Last sentence of stimulus

It would not allow me to post to your previous thread, but... I did not chose E because of the part in the answer choice which states, "...since salaries do not keep pace." I thought the last part of the stimulus says the opposite, that salaries also rise during inflationary periods. Please explain, and forgive my ignorance with respect to economic vocabulary.

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Irina September 22, 2019

@Jwebb,

That's correct, the stimulus tells us that consumer spending goes down despite salaries increasing. The question requires us to identify an answer choice that explains this paradox. (E) tells us that even though the salaries do go up, the prices go up even more, thus salaries cannot keep pace with prices, and consumers' purchasing power decreases. The "do not keep pace" phrase simply means that salaries increase at a lower pace compared to prices, not that salaries go down or stay the same, thus (E) is consistent with the information in the stimulus.

Let me know if you have any further questions.

#JW September 23, 2019

Thanks Irina. Appreciate all your help and quick replies.