Question

1. If an economy suffers from unanticipated deflation, then

	a.	the real burden of nominal debts increases.
	b.	the real burden of nominal debts falls.
	c.	the price level increases unexpectedly.
	d.	it becomes easier for borrowers to repay their debts.
	e.	the value of money falls

2. In the classical model, an increase in the demand for labor leads to

	a.	an increase in the production function.
	b.	an increase in real wages.
	c.	an increase in the quantity of labor.
	d.	an increase in aggregate supply.
	e.	all of the above.

3. An increase in the supply of labor through immigration leads to an increase in real wages and an increase in the quantity of labor.

a. True

b. False

Answer 1

1. The real burden of nominal debt increases.

When there is an unanticipated deflation, the price level falls and the actual debt that the borrowers have to pay in real terms increases. During deflation, the value of money increases. So the real value of the borrower's money increases and he would have to pay more than what he has borrowed in real terms. In nominal terms, he pays exactly what he borrowed.

2. All of the above. With an increase in demand for labour, demand curve shifts outward which leads to a rise in real wage. There would be an increase in production function. With rise in real wage, quantity of labor increases which leads to an increase in aggregate output.

3. False. An increase in supply of labor through immigration leads to a decrease in real wages and an increase in quantity of labor. With more supply of labor, quantity of labour increases. This leads to fall in real wages as many workers are available for work.