Macroeconomics: Questions and Answers Essay example

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ECON1016 Group Work Assessment PROBLEM SET NO 4 (Chapter 30&33) Student #1 Name and ID: Gwee Yi Xuan S3506518, 10148285 Student #2 Name and ID: Cheah Wei Yun, S3509385, 10148653 Student #3 Name and ID: Yong Chang Wei Stanley, S3532641, 10154582 Question 1 Suppose that a country’s inflation rate increase sharply. Explain the following situations. (1 mark for each) a) What happens to the inflation tax on the holders of money? As inflation rate increases sharply, the price level also increases sharply, causing the real value of money that the holders have to decrease. b) Why is wealth that is held in savings account not subject to a change in the inflation tax? Due to the Fisher effect, the bank has already taken…show more content…
d) A casual worker who has no labour contract This unexpectedly low inflation will help the worker, as it meant that they are cheaper to hire. Thus, the company will continue to hire them, regardless of a labour contract, keeping them employed. e) A private school that has invested some of its endowment in Government Bonds. This unexpectedly low inflation will hurt the private school, as the nominal interest rate is lower than expected. This meant that they will earn less revenue from the government bonds. Nominal interest rate (↓) = Real interest rate + Inflation rate (↓) 2 Question 3 a) ‘In the long run, “money is neutral.” (ii) The long‐run aggregate supply curve is vertical Changes in the supply of money affect nominal variables, but not real variables. b) Firms and workers often reach agreements under which nominal wages are “sticky” for periods as long as one or two years. (iii) The short‐run aggregate supply curve slopes up An increase in the inflation rate, increases the quantity of goods and services supplied in the short run. The wages do not adjust immediately to the inflation rate, due to the agreements that fixed the wages for up to one or two years. 3 c) When the price level rises, the real value of savers’ monetary wealth declines. (i) The aggregate demand curve slopes down The nominal value of money is fixed, but the real value is not. When inflation rises, these

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