Question

3 Part Question

Part 1: Money illusion arises when:

a. workers work harder when they know that layoffs are increasing.

b. workers work harder when inflation has raised their nominal wage, even though their real wage is lower.

c. workers work harder when they think their wages have fallen.

d. workers are paid in a unit of account that is different from the medium of exchange. e. All of the above.

Part 2: Suppose that we are at a long-run equilibrium and suddenly aggregate demand rises. In the short run this will:

a. increase prices.

b. increase output.

c. increase real wages.

d. All of the above.

e. Both A and B are correct.

Part 3: A central bank can prevent deflation by conducting monetary policy that:

a. shifts the aggregate supply schedule rightward.

b. shifts the aggregate supply schedule leftward.

c. shifts the aggregate demand schedule rightward.

d. shifts the aggregate demand schedule leftward.

e. Both B and C are true.

Answer 1

1) option B. Nominal wages are adjusted when price level is increased. This is done in order to maintain the real wage. However workers do not observe price level changes and they consider higher nominal wage as higher real wage and start supply more labour

2) option E is correct. aggregate demand curve will shift to the right and in the model it will in increase the general price level as well as the real GDP. Because price level is increased real wages have fallen

3) option C is correct. this is because this step will increase general price level and cause inflation