Question

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

• 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.

• nominal 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

• those that paid the least in taxes.

• those with the most skill.

• those with the highest living standards.

• minority groups and those with the least skill.

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 lower spending and push the economy toward deflation.

• 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 encourage expansionary policies that push the economy toward inflation.

Answer 1

1) Suppose that nominal income increases but rate of inflation increases more than relative increase in nominal income so that cost of living increases. In this manner, real income decreases. Hence the correct option is 2nd (nominal income rises but less than the cost of living increases).

2) Losers from inflation are creditors who receive a lower real income and those with fixed nominal incomes. Hence the correct option is 4th (those with fixed nominal income)

3) Unemployment hurts the least skilled the most because they are the ones who are fired firstly. Hence the correct option is 4th (those with least skilled and minority groups)

4) Correct choice is 1) option. (Option (a) results in creeping inflation, whereas option (b) results in deflation)