Question 40 Deflation a) is the same as disinflation; it means the rate of inflation has fallen. O b) will make you better off if your nominal wages fall more slowly than prices. Og automatically implies that, on average, everyone is better off because prices have fallen. Od) will make you better off if your nominal wages fall more rapidly than prices.

Which of the following is NOT one of the negative effects associated with inflation? O Menu costs, when producers need to constantly update prices to reflect the changing value of the dollar. O The negative impact on borrowers with fixed payments (like mortgage payments). O Shoe leather costs, the cost associated with consumers efforts to ajdust behavior to counter-act inflation. O The lowering of the purchasing power for individuals who hold large amounts of cash. Because of inflation, what happens to the value of the REAL minimum wage during periods of time when congress keeps the minimum wage constant (like it has been since 2009). O Since prices go up, real minimum wage decreases. O The value of the real minimum wage is determined by the level of effort put in by workers. If the congress is keeping the minimum wage constant, the real minimum wage is not changing. O The real minimum wage increases since inflation makes all prices increase.

The table below shows the annual change in the average nominal wage and inflation rate since 2008. a. Compute the percentage change in real income for each year shown in the table. Instructions: In part a, round your answers to two decimal places. In parts b and c, enter your answers as a whole number. If entering a negative number, include a minus sign. Percentage Changes in Nominal Income and Prices Year 2008 2009 2010 2011 2012 2013 Annual Inflation Rate (percent) 3.92% -0.36 1.66 3.24 2.11 1.48 Annual Nominal Wage Growth (percent) 0.34% -1.24 -0.76 1.4 2.76 2.28 Annual Real Wage Growth (percent) (0.39) x % (0.88) ♥ 2.42 x 9.87 x b. Of the years listed above, the paycheck of the average worker declined in 2 c. Of the years listed above, the purchasing power of the average worker declined in of the six years. 4 of the six years. d. The average real income of households can increase whether the nominal wage increases or decreases

Suppose you'll have an annual nominal income of $20,000 for each of the next three years, and the inflation rate is 5 percent per year. Hint: Present value = Future value = (1 + Growth in prices)* = Real value of next year's income = Next year's income ÷ (1+ Growth in prices) Instructions: Round your responses to the nearest whole dollar. a. Find the real value of your $20,000 salary for each of the next three years. Year 1: $ Year 2: $ Year 3: $ b. If you have a COLA in your contract, what is the real value of your salary for each year? Year 1: $ 19047 Year 2: $ 18144 Year 3: $ 17276

3) Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that: A) the real wage will decrease by 4%. B) the real wage will increase by 4%. C) the nominal wage will increase by less than 4%. D) the nominal wage will increase by more than 4%. E) the nominal wage will increase by exactly 4%.

A. Find the real value of your 40,000 salary for each of the next three year's. year1? year2? year3?   b. If you have a cola in your contract, and the inflation rate is 5 percent, what is the real value of your salary for each year? year1? year2? year3?

8. Assume that S, = 1.60 USD/GBP. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 5% while the U.S. experiences an inflation rate of 3%?

15. Suppose that the relationship between inflation rate (π) and unemployment rate (u) is described by the following equation: πt – πte = (m + z) – αut   where m = 0.05, z = 0.04, and α = 2. In this economy, the authorities keep unemployment rate at 4% forever.   a.  If the modified Philips curve describes the relationship between π and u correctly, how should “πte” be specified? Rewrite the equation using this specification. Assume that πt–1 = 1%. Compute πt, πt+1, and πt+2.   b.  Do you believe the answer in part (a)? Why or why not?   c. Derive the natural rate of unemployment.

Negative real interest rates occur when the inflation rate is greater than the nominal interest rate. True or false?   a. False   b. True

The table below shows the annual change in the average nominal wage and inflation rate since 2008. a. Compute the percentage change in real income for each year shown in the table. Instructions: In part a, round your answers to two decimal places. In parts b and c, enter your answers as a whole number. If entering a negative number, include a minus sign. Percentage Changes in Nominal Income and Prices Year 2008 2009 2010 2011 2012 2013 Annual Inflation Rate (percent) 3.78% -0.39 1.6 3.09 2.02 1.42 Annual Nominal Wage Growth (percent) 0.31% -1.1 -0.69 1.27 2.46 2.07 Annual Real Wage Growth (percent) b. Of the years listed above, the paycheck of the average worker declined in c. Of the years listed above, the purchasing power of the average worker declined in of the six years. d. The average real income of households can increase whether the nominal wage increases or decreases of the six years.