Question

Q16: What happens to one’s real income should at a salary of $43,300, a raise of 2.4% gets off set by an inflation rate of 2.8%? .( i got -43300.4 but i'm not sure about )

Q2: Why don’t economists, in the aggregate, advocate the use of price controls as means of governing prices in the short term (in other words, what do price controls in reality do that’s adversary)?

Answer 1

(Q16)

Nominal salary after the raise = $43,300 x 1.024 = $44,339.2

Real salary after the raise = Nominal salary / (1 + Inflation rate) = $44,339.2 / 1.028 = $43,131.52

Therefore, the person is worse off with the raise since real salary after the raise is less than pre-raise salary.

(Q17)

A price control is imposed as either a price floor, imposed below free-market price, or as a price ceiling, imposed above free-market price. For the price floor, at higher price, quantity demanded falls but quantity supplied rises, leading to a surplus. All intended beneficiaries (sellers) cannot sell all their output at the higher floor price. This generates a deadweight loss. For the price ceiling, at lower price, quantity demanded rises but quantity supplied falls, leading to a shortage. All intended beneficiaries (buyers) cannot buy all they want at the lower ceiling price. This too generates a deadweight loss. Since price controls lead to deadweight loss, economists do not advocate them.