Question

1. Suppose workers bargain for a new contract that gives them a 5 percent pay increase over the next year. If they expected no inflation and inflation is in fact 2 percent, inflation makes:

a. both workers and firms worse off.

b. workers worse off and firms better off.

c. workers better off and firms worse off.

d. both workers and firms better off.

2. Social security payments have been adjusted for inflation annually since the late 1970s yet it is sometimes argued that the true cost of living for retirees on social security rises less than the cost of living adjustment used by the government. If this is the case, retirees:

a. are hurt by inflation even with the government's inflation adjustment.

b. are protected from inflation by the government's inflation adjustment.

c. benefit from using the government's cost of living adjustment rather than a more accurate cost of living adjustment.

d. would be better off if the government cost of living adjustment more accurately reflected the true cost of living for retirees.

3. Unexpected inflation hurts:

a. lenders.

b. borrowers.

c. both lenders and borrowers.

d. neither lenders nor borrowers.

4. All of the following fiscal policies will contribute to increasing budget deficits except:

a. tax cuts.

b. increases in defense expenditures.

c. increases in Social Security payments to the elderly and disabled.

d. cuts in aid to farmers.

Answer 1

1)

b)workers worse off but firms better off

Unexpected inflation rises price level to 2%. So workers cannot enjoy the increase in their wagerate of 5%.since Inflation reduce purchasing power. The new increment in pay scale did not affect firms because of the difference in pricelevel

2)

d)would be better off if the government cost of living adjustment more accurately reflected the true cost of living for retirees.

Actually receive a fixed amount of pension.So the true cost of living on social security rises less than the cost of living adjustment made by the government

3)

Inflation means increase in price level and decrease in value of money .Unexpected inflation does not give any time for an individual to take an action to protect themselves.They donot know about the situation until the general pricelevel increases.

a)Lenders.

Lenders are indivuals or companies who provide money at fixed interest rate. The lenders can only receive back the money at a less purchasing power than at the time they loaned out.

  

4)

d)cuts in aid to farmers.Aid to farmers is an expenditure of government.If government exclude farmers aid it add some money to revenue.