Question

Are people worse off when the price level rises as fast as their income? Why do people often feel worse off in such circumstances?

Answer 1

Solution:

It is not necessary peoply worse off when the price level rises as fast at their income. It depends on person's consumption bundle. The inflation rate is a composite rate than no individual actually faces. Everyone faces some other rate of inflation depending on mix of goods and services they puchase. If the goods of services they purchase for which price increases are less than average rate of infloation, their real income will increase.On the other hand, real income will decrease if goods/service purchased are having higher inflation rate than average.

People often feel worse off in this situation because they feel as if they are being cheated. Their higher wages do not buy any additional goods.