Question

In the last few decades the car manufacturing sector has found it difficult to compete with foreign car imports. High labor costs is one of the main reasons economist site as the lack of competitiveness for the car manufacturing industry. If there was modest inflation, how could it possibly help the car manufacturing industry in the United States compete with foreign car manufacturers?

a. The consumers of the cars have increased purchasing power.

b. Business loans would cost less for the U.S. car manufacturers.

c. It could allow real wages to downwardly adjust more easily.

Answer 1

a. If purschasing power of consumer have increased than the consumer will prefer experience and luxrious cars. Hence the foreign cars complete both conditions and therefore the consumer will buy foreign cars.

b. If business loans for the producer of cars costs less than it can help in increasing production of cars in the sector by hiring labroures hencetherefore the demand will also increase for the local brand.

c. If the real wages are downwardly adjusted than the real purchasing power decreases and the demand for cars will also decrease.