Question

1. Determine if the following statements are correct and then explain briefly.

a. Policymakers in a closed economy could promote economic growth by encouraging saving.

b. When the government removes the minimum wage law, natural unemployment will fall.

c. If inflation is lower than expected, creditors gain at the expense of debtors.

d. Increase unemployment benefit payment to the unemployed will increase unemployment.

Answer 1

1.

A

The given statement is not correct, because, in a closed economy, it is the spending by people that is encouraged by policy makers to stimulate the demand. It promotes the economic growth. So, higher the spending, creates higher aggregate demand and it increases the real output in the economy.

B.

It is the correct statement, because removal or minimum wage laws, is a structural change, that will reduce the structural unemployment. It will cause the natural rate of unemployment to decrease. This conclusion is also supported by the fact that demand for workers will increase as firms can now hire workers at lower wages also.

C.

It is a correct statement, because the real value of money is higher than the expected value of money. It means that real value of money received by the creditors is relatively bigger. It will benefit the creditors at the expense of debtors.

D.

It is a correct statement, because higher level of unemployment benefits, will cause unemployed  people to find jobs with higher wages. It makes them to pass on the jobs that come with lower wages. As a result, the unemployment rate increases.