Question

1.When Inflation occurs, but the fix wage labor contract and lending contracts don’t have an inflation clause written in the contracts, List who gains from the inflation and why a. In fixed wage labor contracts: gainers are______________, because____________________ b. In fixed interest rate lending contracts: gainers are_____________. Because ______________ c. In progressive income tax laws gainers are_______________because_________________________ 2. When deflation occurs, but the fix wage labor contract and lending contracts don’t have a deflation clause written in the contracts, List who gains from the deflation and why d. In fixed wage labor contracts: gainers are______________, because____________________ e. In fixed interest rate lending contracts: gainers are_____________. Because ______________ f. In progressive income tax laws gainers are_______________because_________________________

3. If a 3%/year inflation rate is expected over the next few years, how would labor contracts and lending contracts and progressive income tax law be adjusted to minimize the gains and losses from inflation a. labor contract should have a clause that states the wages will____________ b. lending contracts should have a clause that states interest rates will_________________ c. progressive income tax laws should have a clause that states an individual’s income will have to ____________ 4. Define unemployment

5. define the labor force

6. define the unemployment rate

7. define the labor force participation rate 8. List the sources of “natural unemployment”


9. Extra credit: if inflation occurs who would gain: holders of money balances, or holder

Answer 1

Answer to the question no. 1.a:

In fixed wage labor contracts: gainers are employer, because during inflation the price of the commodity of the producer increases, but his cost in as a part of labour wage doesn't rise, and the real wage of the workers fall and the employer gains.

Answer to the question no. 1.b:

In fixed interest rate lending contracts: gainers are borrowers. Because during inflation the value of money falls and the lenders are generally the savers, so, as a result of inflation, the real rate of interest fall. So, in real terms lenders get less and less with increasing rate of inflation.

Answer to the question no. 1.c:

In progressive income tax laws gainers are the tax collecting authorities, that is the government. Because, during inflation as the income of one class increases they go into a higher slab of income and pays more percentage of tax. So this way, the government gains by earning more revenues.

Answer to the question no. 2.d:

In fixed wage labor contracts: gainers are the workers, because during deflation the price of the commodity of the producer falls, but this costs the employer, and the real wage of the workers increases and they gains.

Answer to the question no. 2.e:

In fixed interest rate lending contracts: gainers are lender. Because during deflation the value of money rises, so, as a result of deflation the real rate of interest rises. So, in real terms lenders get more and more with increasing rate of deflation.

Answer to the question no. 2.f:

In progressive income tax laws gainers are the tax payers. Because, during deflation the income of people falls and they go into a lower slab of income and pays less percentage as tax. So this way, the government losses and the tax payers gain.

Answer to the question no. 3.a:

Labor contract should have a clause that states the wages will increase by 3% every year. Or the real wage will be maintained over the years.

Answer to the question no. 3.b:

Lending contracts should have a clause that states interest rates will increase by 3% per year. Or the real rate of interest will be maintained.

Answer to the question no. 3.c:

Progressive income tax laws should have a clause that states an individual’s income will have to be taxed considering his increased cost of living because of the inflation. So, that the real burdem of tax remain same.

Answer to the question no. 4:

It is a state of being unemployed. A person is called unemployed if despite of having ability and willingness to work at current prevailing wage rate he cannot find any work.

Answer to the question no. 5:

It is the number of people of a region who are able and willing to work.

Answer to the question no. 6:

Unemployment rate is equal to the number of unemployed people divided by the labour force of the region.

Answer to the question no. 7:

Labour force participation rate is the section of working population in the age group of 16-64 in a region currently employed or seeking employment. Students, hoousewives or people under 16 or above 64 are not considered under labour force participation.

Answer to the question no. 8:

Natural rate of unemployment includes the structural unemployment and the frictional unemployment. Structural unemployment is the unemployments that occurs because of the structural changes in the economy. And the frictional unemployment is because of the people being in the process of moving from one job to another.

Answer to the question no. 9:

If inflation occurs, the holder of money balance looses. Becuase the value of money falls during the inflation. S, if one holds the money balance in hand than inflation will reduce the purchasing power of his holding.

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