Question

1. At the current level of output, suppose the actual price level is less than the price level that individuals expect (i.e., Pt < Pet).

We know that:

A. output is currently below the natural level of output.

B. the interest rate will tend to rise as the economy adjusts to this situation.

C. the nominal wage will tend to increase as individuals revise their expectations of the price level.

D. any subsequent reduction in the aggregate price level will cause an increase in the real money supply and a rightward shift in the aggregate demand curve.

E.none of the above

2. Suppose the minimum wage increases. Given this event, we would expect which of the following to occur?

A. no change in the real wage in the medium run

B. an increase in the aggregate price level as output decreases

C. an increase in the interest rate in the short run

D. all of the above

Answer 1

1) Answer:- Option D:- any subsequent reduction in the aggregate price level will cause an increase in the real money supply and a rightward shift in the aggregate demand curve.

Reason:- The market price value always plays the driving force to fix the sales margin with the high rate. But the firms also need to consider the purchasing power of all set of people. The consumers will usually prefer the expected price to buy the needed products. Such expected price should be favor their purchasing satisfaction by saving the money. This can also be termed as a consumer surplus. Then the position of the demand curve will shift to the right position and will obviously increase the real money supply. Real money supply is related with the adjusted conditions of inflation. So the effects of inflation results in the positive move of consumer surplus.

2) Answer:- Option B. an increase in the aggregate price level as output decreases

Reason:- The increase in the minimum wage will leads to increase in the demand of the goods. But the cause of huge wage difference will cause the increase in the purchasing power of the consumers. Though it adjust with the real wages conditions, but in the production side, the quantity of output decreases as firms need to incur extra cost for labor in order to pay for the extra wage they are fixed. And directly the cost of production also increases with the cost of labor. The cost of labor also included in the cost of production. So in the short-run basis firm decreases the quantity of output as it need to take some time to adjust the cost of production with the increase in the minimum wages.