Question

1. Imagine the labor supply curve is perfectly inelastic. A minimum wage set above the market clearing wage causes the most unemployment when the labor demand curve is

A. Perfectly elastic
B. Somewhat elastic
C. Perfectly inelastic
D. A minimum wage set above the market clearing wage will not cause unemployment because the labor supply curve is perfectly inelastic.

2. Suppose the price of a large basket of goods and services is $103,000 this year. If it is $111,000 next year, which of the following is closest to the inflation rate?

.062
.078
.072
-.078

3. The nominal interest rate equals
The inflation rate
The real interest rate plus the inflation rate
The real interest rate divided by the inflation rate
The price level

4. The accounting identity at the heart of the quantity theory of money is Mv=PY. Changes in P are solely attributable to changes in M if

v is stable
Y is stable
v and Y are stable
None of the above

Answer 1

1. The correct answer is somewhat elastic. This is because inelastic labor supply implies a vertical labor supply curve. Now, if the market labor demand curve is somewhat elastic, only then there will be unemployment.

The other options are incorrect because if the labor demand is perfectly elastic, then there will no unemployment due to change in wage rate.

If the labor demand curve is inelastic, we cannot determine the equilibrium in the economy.

2. The inflation rate can be calculated as:

(111000- 103000)÷103000 = 0.78

Thus, b is the correct answer.

3. The formula for the nominal interest rate is given as real interest rate plus inflation rate in the economy. This is because nominal interest rate includes the effect of inflation rate as well.

Thus, b is the correct answer.

4. The correct answer is if v and Y are stable.

This is because if v and Y are unstable, then it would be difficult to determine the change in P due to changes in M because changes in P will also change the values of V and Y in the economy.