Question

reference is macmillan learning achieve macroeconomics

1. Which of the following is not a demand shifter?

A) The price of the product.

B) The price of a complementary good.

C) The price of a substitute good.

D) The number of buyers in the market.

2. Which of the following is an example of someone who is experiencing money illusion?

A) The CPI in an economy has increased by 2.3%, and Paul's nominal wage is increased by 2.3%.

B) The CPI in an economy has decreased by 5%, but Vivian will not accept lower nominal wages because she believes this is unfair.

C) Prices have not changed in the economy, so your boss does not give you a raise.

D) Darren sees that prices in the economy have risen by 2% and that the nominal interest rate on his savings account rose 0.5%. So Darren knows he is experiencing a 1.5% decrease in his real interest earnings.

3. Suppose that an economy is in a recession. You would expect to see the unemployment rate:

A) rise above the equilibrium unemployment rate.

B) fall below the equilibrium unemployment rate.

C) be zero.

D) be equal to the equilibrium unemployment rate.

4. If expected inflation is 3% and actual inflation is 4.2%, then unexpected inflation is:

A) 3.0%.

B) 7.2%.

C) 1.2%.

D) 4.2%.

Answer 1

Q1:

The price of the product is not a demand shifter, it will result in change in quantity demanded( i.e. movement along the demad curve). All other options will result in change in demand at each price(i.e shift in demand curve). Therefore, option A is correct. An example demad shift is given in the diagram below:

Q2:

Money illusion refers to the situation in which some nominal income increases can be mistakenly taken as increase in its real purchasing power.  when in fact due to inflation the purchasing power in real terms may be decreasing. This means option B is a case of money illusion as his real wages have increased due to decrease in CPI and he doesn't agree to accept lower nominal wages.

Q3:

During a recession the unemployment rate will rise above the equilibrium unemployment rate. therefore option A is correct.

Q4:

The unexpected inflation will 1.2% (actual inflation - expected inflation). option C is correct.

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