Suppose the government lowers unemployment by hiring more government workers. How does it matter whether wages and prices are sticky?
What will be an ideal response?
As long as wages and prices are sticky, then the decrease in the unemployment rate will not cause a substantial increase in wages. However, if workers throughout the economy perceive an opportunity to seek an increase in their real wage, employers may need to comply in order to retain and attract qualified workers. If nominal wages increase, producers will need to raise prices. The resulting inflation will cause expected inflation to rise, sparking further increases in the nominal wage.
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Country A can product 100 units of Good X in a day and 40 units of Good Y while Country B can produce 50 units of Good X and 40 units of Good Y
A) These countries will not trade since Country A has a comparative advantage in the production of both goods. B) These countries will not trade since Country A will always be able to take advantage of Country B. C) These countries should trade since Country A has a comparative advantage in the production of Good X and Country B has a comparative advantage in the production of Good Y. D) These countries should trade since Country B has a comparative advantage in the production of Good X and Country A has a comparative advantage in the production of Good Y.
Suppose the velocity of money is not fixed, but stable at about two percent growth per year. How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with
velocity growing at two percent per year, what would the growth rate of the other variables in the theory need to be to cause inflation? What will be an ideal response?