Question

Suppose your wage has just been increased fro $20 per hour to $22 per hour. The nominal interest rate is 3.5% and the inflation rate is currently 16%. Based on this information, what has happened to your real wage?

a. it has not changed

b. it has increased

c. it has decreased

d. it is impossible to tell based on this information

What specific action by a central bank produces “monetized debt?”

a. The Federal Reserve issues more currency
b. The U.S. Treasury buys debt issued by the Federal Reserve
c. The World Bank buys U.S. debt and issues Certificated Of Deposit based on the debt collateral
d. The Federal Reserve buys bonds issued by the U.S. Treasury
e. China returns surplus dollars to the U.S.
f. Foreign governments buy bonds issued by the U.S. Treasury Department

Answer 1

Answer 1

Option c) is correct. It has decreased

Reason: Let us move step by step to find out the real wages after all the changes.

The nominal wage after inculcating the interest rate = $22 * (1 + 3.5% )

= $22 * 1.035

= $22.77

Now, discounting it due to the inflation, the real wage = $22.77 * (1 - 16%)

= $22.77 * 0.84

= $19.13

Thus, Real wage has decreased.

Answer 2

Option d) is correct. The Federal Reserve buys bonds issued by the U.S. Treasury

Reason: Debt monetisation is a term that refers to the purchase of government bonds by the central bank to finance the spending needs of the government. Since the central bank creates fresh money to purchase these bonds in the open market, debt monetisation leads to an increase in total money supply.