Why is the demand for real money balances related to the nominal interest rate, rather than the real interest rate?
What will be an ideal response?
Because expected inflation is irrelevant to deciding between money versus interest-bearing assets. Whether expected inflation is high or low, interest-bearing assets generate income at the nominal interest rate, and that income is the opportunity cost of holding money. Expected inflation implies a reduction in the purchasing power of money affecting equally both money held and money received as interest income.
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In free exchange among two individuals the position on the contract curve finally arrived at will, among other things, depend on: I. The bargaining strength of each individual. II. The initial endowments of the individuals. III. The individuals' preferences. Which of these correctly completes the statement?
a. Only III. b. Only II. c. I and III, but not II. d. II and III, but not I. e. I, II, and III.
Suppose that neither food-service workers nor retail salespeople are unionized. If food-service workers unionize, then the supply of retail salespeople will
a. rise, as will the wages of retail salespeople. b. rise, and the wages of retail salespeople will fall. c. fall, as will the wages of retail salespeople. d. fall, and the wages of retail salespeople will rise.
Suppose your community is considering using public money to build a new sports stadium for the team that is already in the community and unlikely to ever leave. Suppose you are watching a news broadcast in which the supporters are saying that it will enhance economic activity because of the increase in restaurant activity that will occur around the new stadium. Now suppose you hear that an independent economist is going to appear during the next segment. It is likely she will say
A. there will be no new jobs created. B. there will be no new jobs created in net because there will be about the same number of restaurant jobs lost near the old stadium as gained near the new one. C. the jobs created in the area will make it worth the investment. D. it may be a short-term cost, but in the long term, it will be worthwhile.
The aggregate consumption function is C = 100 + 0.8Yd. If income is $600 and net taxes are zero, consumption equals
A. zero. B. 360. C. 460. D. 580.