Exchange Rates And Consumer Choice: Compensating Government Workers For Declines In The Dollar

Abstract

Traditional indifference curve theory is limited to explaining consumer choice between two goods or groups of goods; however, in the latter case the groups are seldom well-defined or relevant. The current article evaluates consumer adjustment between two relevant, well-defined groups of commodities, one denominated in U.S. dollars, the other in Deutsch marks. Changes in currency exchange rates and resultant changes in consumer behavior are easily analyzed using traditional indifference curve analysis. Additionally, compensation schemes customarily used to offset fluctuations are shown not to be welfare neutral.