Question

TRUE OR FALSE:

a) Higher expected inflation causes workers to demand faster raises in order to maintain the purchasing power of their wages.

b) If unemployment is high, workers will be relatively strong and firms will be forced to raise prices faster.

c)Faster productivity growth gives firms more pricing power and allows firms to raise their prices more quickly. That is, inflation rises when productivity grows faster

d) If the expected rate of inflation is below the actual rate of inflation, unemployment will be below the natural rate of unemployment, because of the effect of low expected inflation on workers’ wage rise demands.

Answer 1

a) True. Because inflation causes rise in prices due to increase in production costs, i.e. wages and raw materials costs which increases the final cost of goods and services for the end consumers and consumers need to have more purchasing power to spend on these goods and services. The more the inflation is there it causes workers or employees to demand raises to increase their purchasing power in the economy.

b) False. Because when unemployment is high it leads to more demand of labor and this exceeds the number of jobs available in market and with so many people looking for opportunities it makes employers or firms to keep wages constant for the existing labors instead of raising it faster.

c) True. Because faster productivity growth means more increament in spending power by consumers and larger money supply so firms can raise prices.

d) True. Beacuse due to decreased rate of employment the effect will be low on worker's wage rise and they can raise in their wages from the employers which results in expected rate of inflation below actual rate of inflation.