Question

1. If there is deflation of 1% and a firm wants to leave real wages unchanged, it will need to:

A) lower nominal wages by 1%.

B) raise nominal wages by 1%.

C) leave nominal wages unchanged.

D) lower real wages by 2%.

2. Crowding out is the:

A) increase in business investment as opposed to household investment.

B) increase in inventories due to a recession.

C) reduction in private investment due to a rise in government spending.

D) reduction in the budget deficit.

3. Which of the following is not a demand shifter?

A) The price of the product.

B) The price of a complementary good.

C) The price of a substitute good.

D) The number of buyers in the market.

Answer 1

1) Answer is A

If deflation is 1% than nominal wages should be decreased by 1% in order to leave the real wages unchanged. If nominal wages are not changed than real wages will increase by 1% due to deflation.

2) Answer is C.

Crowding out means decrease in private investment due to increase in spending by government.

When government increases the spending it borrows from the market which raises the interest rate in market for funds. Due to this increased interest rate private people may less likely to invest. So private investment decreases.

This is called Crowding Out.

3) Answer is A. Price of the product.

Demand curve shifts when there is change in demand due to any factor other than the price of the product.

If demand changes due to price of the product it will not shift the curve. It will be shown by the movement on the curve.

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