Question

8)

a. An increase in your nominal income and a decrease in your real income might occur simultaneously if your nominal income increases more than the cost of living increases. real income increases at the same rate as the cost of living increases. nominal income increases less than the cost of living increases. real income increases more than the cost of living increases. b. The losers from inflation are those with significant debt. incomes that increase at the rate of inflation. no savings. fixed incomes in nominal terms. c. Those who lose the most from unemployment are minority groups and those with the least skill. those with the most skill. those that paid the least in taxes. those with the highest living standards. d. Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate. Which of the following statements is true? Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might encourage expansionary policies that push the economy toward inflation. Option (a) might encourage expansionary policies that aggravate inflation, whereas option (b) might lower spending and push the economy toward deflation. Option (a) might encourage expansionary policies that aggravate inflation, whereas option (b) might encourage expansionary policies that push the economy toward inflation. Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation.

Answer 1

1.An increase in your nominal income and a decrease in your real income can occur simultaneously if your

Option C i.e.nominal income increases less than the cost of living increases.

Nominal income is income that is not adjusted for changes in purchasing power, the amount of goods or services that one can afford with the income, owing to inflation. The cost of living is the amount a person needs to spend to cover basic expenses such as housing, food, taxes, and healthcare. Real income is income of individuals or nations after adjusting for inflation. It is calculated by dividing nominal income by the price level. From these definitions it is clear that if nominal Income increases less than cost of living then real income will decrease.

2. The losers from inflation are those with

Option D i.e.Fixed incomes in nominal terms.

Inflation has negative effect on fixed income.When inflation begins to exceed the desired threshold, officials will increase interest rates. Since the interest payments from existing fixed-income assets become less competitive relative to newer higher rate fixed-income instruments, prices of existing fixed-income assets will typically fall.

3.Those who lose the most from unemployment are

Option A i.e. minority groups and those with the least skill.

Minority Groups and low skill workers are the most affected by Unemployment. This is because these minority groups have to face discrimination from employers in terms of minimum wages and other things also and low skill workers are not demanded by market.

4.Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate. Which of the following statements is true?

Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation

Creeping inflation is a condition where the inflation in a country increases slowly but continuously over a period of time and the effect of inflation is noticed after a long period of time. The conventional view is that full-employment can lead to inflationary pressures within an economy as high demand for goods and services leads to higher demand-pull inflation. And increasing demand for factor resources drives their prices up too - leading to cost-push inflation.

The normal rate of unemployment is about 3 to 4%. Unemployment rate of 8% along with price stability will make people cautious in spending much. They will more interested in saving thus aggregate demand will be reduced and this may ultimately result in deflation.