Suppose Oregon proposes indexing the minimum wage to inflation. Describe the substitution and scale effects you anticipate with this policy. (In your response, assume that the minimum wage is an effective price floor and that both factor and product markets are perfectly competitive.)

Indexing the minimum wage to inflation in economics refers to adjusting the minimum wage to prevent low-income earners from losing their purchasing power.

Increasing the minimum wage will increase production and consumption capacities despite the effects of inflation. This is because people will have more to spend in the market, thus consuming more and producing more. In addition, increasing the minimum wage will help maintain the consumption and production rates during inflation because people will spend almost similar or equal amounts in the economy during the inflation period.

However, the minimum wage increase may contribute to a rise in unemployment rates since businesses and companies will prefer to employ fewer people due to the increased wages. It may also lead to an increase in poverty since more people lack the income to cater to their basic needs. Such an effect may lead to a decline in consumption and spending rates in the economy during inflation.