1. A. The average hourly wage in 1975 was $6.50, and $17 in 2002. CPI stood at 42 in 1975 and the CPI base year is 2002.

(i)Calculate the rate of inflation between 1975 and 2002.

(ii) What is the average hourly wage in 2002 in real terms (i.e. in terms of the 1975 average hourly wage)?

(iii).In terms of living standards, is the worker better off in 1975 or 2002? Justify your answer.

B. Why might bank be reluctant to lend money if a country has a history of inflation rising unexpectedly? Justify your answer(s).

2. Most people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves.

1. Calculate the extended money multiplier

(ii). Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation.

b. In which situation can the simple money multiplier value equal that of the extended money multiplier value? Justify your answer with a numerical example.

3. COVID-19 has sent the economy of Classica into recession. The finance ministry has advised the government to lower stamp duty and other purchase service charges for those wanting to buy existing houses in order to boost economic growth. As well, the finance ministry wants the government to also cut company taxes as this will lead to firms increasing their level of investment in the economy. The President of Classica has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:

(i)would a cut in stamp duty and other purchase charges on the purchase of existing houses really boost the economy? Your advice on this is ____________________

(ii). Is the claim that lower company taxes adding to investments correct or is it debatable given the prediction on economic growth remains negative, and can you explain why? Your advise on this is ____________________

(4). Your father has just stated that countries with high levels of debt-to-GDP ratios are poor countries and that countries with low levels of debt-to-GDP ratios are rich countries. Explain why you agree or disagree with this statement and provide real-world evidence to support your argument.

5. (a). Inflation in Theoretica is currently below the target range of its central bank. What does this tell you regarding Theoreticas likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram

(b). Your mother states that lowering interest rates in the recessionary COVID-19 period is good policy because it will guarantee consumers will spend more as it is cheaper to borrow money. Do you agree or disagree with her statement? Provide two reasonings to justify your answer.

(c). Is either helicopter money or quantitative easing preferred in times of severe recessions in order to boost economic activity? Briefly explain your reasoning.