Question

1. Which is an appropriate response to demand deficient unemployment?

a. A reduction in taxation rates

b. An increase in interest rates

c. A decrease in government spending

d. A reduction in benefits to the unemployed

2. Unemployment may lead to:

a. An outward shift of the production possibility frontier

b. A movement along the production possibility frontier

c. Production outside of the production possibility frontier

d. Production inside the production possibility frontier

3. Which of the following is likely to be true with high, unanticipated inflation?

a. A country will become more internationally competitive

b. It will become easier for businesses to plan

c. Individuals with constant nominal income will be worse off in real terms

d. Costs will fall

Answer 1

1.) Option 'A' seems to be the best fit.

Demand deficient unemployment occurs when the demand is insufficient to maintain full employment. This occurs during the period of recession when demand falls. To tackle this, generally taxation is reduced to boost the demand and consumer spending so that a proper balance between demand and supply is achieved.

2.) Option D is correct, production inside the production possibility frontier graph.

The points inside the PPF refers that the resources available for production is not used at its capacity and efficiently and hence is the result of unemployment.

3.) Option 'C' is correct. Individuals with constant nominal income will be worse off in real terms.

As inflation rises, the purchasing power goes down as we see a surge in price . This directly affects individuals with constant nominal wage as their purchasing power reduces and hence real wage decreases( since real wages are purchasing power of nominal wages).