Question

Q17:Consider in a work contract employers promise that nominal wages of employees are going to increase by 2% - 3% per year. What does this imply?

		a)Real wages of employees are expected to increase by 2% - 3% per year.
		b)The inflation rate is expected to increase by 2% - 3% per year.
		c)Employees' purchasing power is expected to increase by 2% - 3% per year.
		d)It means nothing.

Q18:

Expansionary monetary policy

		A)shifts the money supply curve up.
		B)decreases the cost of holding money.
		C)shifts the money demand curve down.
		D)is usually conducted to meet a higher target cash rate.

Q19:

Why is the Long Run Aggregate Supply curve vertical?

		In the long run, we assume that no factors relevant to the long run output can change.
		The natural level of output (Y^N) is constant in the long run where the inflation rate has always been perfectly anticipated and productivity has always equalled its trend.
		Inflation is constant in the long run.
		Consumption will automatically adjust to keep output in the long run at natural level (Y^N).

Answer 1

17) Growth of Nominal wage = Growth of real wage + Inflation rate

Increase in nominal wage by 2% - 3%

It will raise cash holdings of people which will raise aggregate demand in the economy and raise price level. It will result in rise in inflation rate. Option B is correct.

18) Expansionary monetary policy shifts LM curve rightward which makes option A incorrect.

Option B is correct because it will decrease the cost of holding money as rise in money supply reduces rate of interest.

Option C is incorrect as it does not have any direct impact on demand curve

Option D is incorrect because it reduces the current rate of interest.

19) Long run aggregate supply is vertical becuase inflation rate if anticipated and productivity has always equalled in trend from the past experiences. Option B is correct.