Question

Based on the wage setting condition, we know that a decrease in unemployment benefits will cause:

	an increase in the real wage.
	no change in the real wage.
	a downward shift of the WS curve.
	a reduction in the real wage.
	an upward shift of the WS curve.

Which of the following best describes the nominal exchange rate:

	the price of foreign goods in terms of domestic goods.
	the price of foreign bonds in terms of domestic goods.
	the price of foreign currency in terms of domestic currency.
	the price of domestic currency in terms of foreign currency.
	the price of foreign bonds in terms of domestic bonds.

As the economy moves up and to the left along the IS curve, which of the following will occur when exchange rates are flexible?

	The domestic currency depreciates.
	Consumption increases.
	Investment spending increases.
	More than one of the above.
	None of the above.

Answer 1

Answer- an upward shift of the WS curve.

This implies that when unemployment falls any firm has to increase the worker's wage rate. Since the availability of work is higher and the labor can find work elsewhere, so to retain the labor, wage has to be increased.

Answer- the price of domestic currency in terms of foreign currency.

Nominal exchange rate is the amount required to buy a foreign currency by the domestic currency or it is the comparison of a country's currency with other country's currencies. It is different from real exchange rate.

Answer- None of the above.

As the economy moves up along the IS curve the flexibility of exchange rate will improves the value of the domestic currency and decrease in investment spending. Also the net export also decline. Consumption decrease with reduce in investment spending. This is significant improvement in the economy.