Why is the difference between the actual and expected rates of inflation important for explaining inflation?
What will be an ideal response?
When the actual rate of inflation is higher than the expected rate of inflation, profits temporarily rise because prices that firms charge for their products are rising faster than wage rates. (The nominal wage rates were based on a lower expected rate of inflation than actually exists.) With more revenues, firms can afford to employ more workers so the unemployment rate temporarily falls. In the long run, firms and workers adjust their expectations to the new higher rate of inflation. This means that there will be an increase in the nominal wages rate, so the profits decrease. The firm cannot afford to hire as many workers so some workers get laid off. The unemployment rate rises and returns to its natural rate.
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A sum of money received at a future date is worth less than the same sum of money received today. Why? Explain this with an example.
What will be an ideal response?
The amount of a tax paid by the sellers will be larger the more ________ the demand and the more ________ the supply
A) elastic; inelastic B) inelastic; elastic C) inelastic; inelastic D) elastic; elastic
If both buyers and sellers expect the price of a commodity to rise in the future, it is likely that the market clearing price ________ and the equilibrium quantity ________
A) will fall, cannot be predicted B) will rise, cannot be predicted C) cannot be predicted, will fall D) cannot be predicted, will rise
The marginal propensity to consume explains how much of the next dollar of disposable income
A) a household will spend. B) a business will invest. C) the government will spend. D) foreign residents will use to purchase domestic exports.