Macroeconomics: Questions and Answers

886 words 4 pages
ECON1016 Group Work Assessment
PROBLEM
SET NO 4 (Chapter 30&33)
Student #1 Name and ID: Gwee Yi Xuan S3506518, 10148285
Student #2 Name and ID: Cheah Wei Yun, S3509385, 10148653
Student #3 Name and ID: Yong Chang Wei Stanley, S3532641, 10154582
Question 1
Suppose that a country’s inflation rate increase sharply. Explain the following situations. (1 mark for each)
a) What happens to the inflation tax on the holders of money?
As inflation rate increases sharply, the price level also increases sharply, causing the real value of money that the holders have to decrease.
b) Why is wealth that is held in savings account not subject to a change in the inflation tax?
Due to the Fisher effect, the bank has already taken
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(iii) The short‐run aggregate supply curve slopes up
As the firms change their output prices at long intervals, it does not affect the short-run aggregate supply curve, so it will remain to slope upward.

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e) When the price level falls, the real value of savers’ monetary wealth rises.
(i) The aggregate demand curve slopes down
The nominal value of money is fixed, but the real value is not. When price level falls, these dollars are more valuable because they can now be used to buy more goods and services. 5

Question 4
State whether true, false or uncertain with brief explanation for the following (1 mark for each):
a) ‘Inflation hurts borrowers and help lenders, because borrowers must pay a higher rate of interest.’
True: The nominal interest rate will increase due to the increase in inflation rate. Thus, borrowers must pay a higher rate of interest.
Nominal interest rate (↑) = Real interest rate + Inflation rate (↑)
b) ‘If prices change in a way that leaves the overall price level unchanged, then no one is made better or worse off.’
Uncertain: Depending on which variable has changed. More information is needed.

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Question 5
Explain why the following statements are false: (1 mark for each)
a) ‘If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.’
The short-run aggregate-supply curve would be upward-sloping. In the short-run, an increase in

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