Question One (30points: 3 points each) Select the correct answer from the following: 1 2 3 4 5 6 7 8 9 10 d a d b c d d c d d 1. To ensure that a nominal payment represents a constant level of purchasing power over time, one should: a) add a price index to it. b) subtract a price index from it. c) divide it by a price index. d) increase it by a percentage equal to the rate of inflation for that year. 2. Suppose that the CPI does indeed overstate the rate of inflation. When the CPI increases by 5% and household incomes increase by 5%, we should conclude that the real incomes of households: a) increased. b) stayed constant. c) decreased. d) increased more slowly than inflation. 3. Making more frequent, but smaller cash withdrawals from banks _____ the inflation losses from holding cash and ____ the shoe leather costs of inflation. a) increases; increases b) increases; reduces c) reduces; has no impact on d) reduces; increases 4. The "true" costs of inflation to an economy include all of the following EXCEPT: a) shoe-leather costs. b) higher relative prices. c) noise in the price system. d) unexpected redistribution of wealth. 5. If the real interest rate is 6% and the inflation rate is 12%, then the nominal interest rate equals a) 2%. b) 0.5%. c) 6%.Fall 2020-2021 d) 36%. 6. The demand for labor depends on ______ and _______. a) the supply of labor; the marginal product of labor b) the supply of labor; the price of output produced c) the rate of price inflation; the price of the output produced d) the marginal product of labor; the price of output produced 7. The marginal product of labor is the additional: a) wage paid for an additional hour of work. b) wage paid for an additional worker employed. c) labor employed to produce one more unit of output. d) output produced by one more worker. 8. According to the principle of diminishing returns to labor, if the amount of capital and other inputs are held constant, employing additional workers a) increases output at an increasing rate. b) increases output at a constant rate. c) increases output at a decreasing rate. d) decreases output at an increasing rate. 9. Firms will hire additional workers as long as the wage: a) is less than the marginal product of labor. b) equals the marginal product of labor. c) is greater than the marginal product of labor. d) is less than the value of the marginal product of labor. 10.Structural unemployment is increased when the wage is kept above the marketclearing wage by: a) unemployment insurance. b) worker mobility. c) skill-biased technological change. d) labor unions.Fall 2020-2021 Question Two (40 points) 1. A consumer expenditure survey reports the following information on consumer spending: 2020 2021 Price Quantity Price Quantity Product (1) $10 7 $10 7 Product (2) $6 10 $8 12 Product (3) $12 5 $14 10 a) Using 2020 as the base year, by how much does a "cost of products" index increase between 2020 and 2021? Cost of basket for year 2020 = (10 x 7) + (6 x 10) + (12 x 5) = 190$ Cost of basket for year 2021= (10 x 7) + (8 x 10) + (14 x 5) = 220$ Consumer Price Index for year 2020 which is the base year = 100 Consumer Price Index for year 2021 = (Cost of basket in the current year / Cost of basket in the base year) x 100 = (220 / 190) x 100 = 115.78 So, the increase in the Consumer Price Index between 2020 and 2021 = (CPI for the current year - CPI for the base year) / CPI for the base year x 100 = (115.78 - 100) / 100 x 100 = 15.78% (10 points) b) Calculate the inflation rate between 2020 and 2021, using the CPI you calculated in (a) Inflation Rate = Consumer Price Index for Year 2 - Consumer Price Index for Year 1 / Consumer Price Index for Year 1 x 100 = 115.78 - 100 / 100 x 100 = 15.78%Fall 2020-2021 (10 points) 2. The CPI equals 1.00 in year one and 1.40 in year two. If the nominal wage is $3000 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two? (10 points) Nominal Wage in year 2 = Nominal Wage in year 1 x CPI for year 2 / CPI for year 1 = 3000 x 1.40 / 1.00 = $4200 3. Waleed is lending Emad $1,000 for one year. The CPI is 1.40 at the time the loan is made. They expect it to be 1.54 in one year. If Waleed and Emad agree that Waleed should earn a 6% real return for the year, what is the nominal interest rate? Inflation Rate = CPI for year 2 - CPI for year 1 / CPI for year 1 x 100 Inflation Rate = 1.54 - 1.40 / 1.40 x 100 = 10% Nominal Interest Rate = Real Interest Rate + Inflation Rate Nominal Interest Rate = 6% + 10% = 16%