How does inflation hurt those on fixed incomes?
- It reduces their real income.
How can savers protect themselves from inflation?
- They can demand a higher nominal interest rate. Recently, some savers have been demanding a variable interest rate based upon short-term interest rates, which usually reflect current inflation rates.
Why do interest rates eventually go up during a period of inflation?
- As savers come to expect higher rates of inflation, they demand higher nominal interest rates to compensate them for their loss in purchasing power.
When inflation causes greater uncertainty in the economy, workers often demand higher real wages as compensation for the higher uncertainty. How does this hurt the economy?
- Applying the laws of demand and supply to labor, this event causes the supply curve of labor to shift left. As a result, employment falls. With less employment, output and GNP fall.
If real GNP is constant while the GNP Deflator increases, what will happen to nominal GNP?
- Nominal GNP will increase.
What does a price index of 180 mean? How much have prices risen since the base year?
- The cost of a basket of goods is 180% of its base-year cost. Prices have risen 80% since the base year.
Why does an improvement in quality causes a price index to overstate how much prices have gone up?
- An improvement in quality gives the consumer more value per dollar, so that even if the price of the item is unchanged, its cost-per-unit value is reduced.
What are the different ways someone can become unemployed?
- A person can quit, be fired, or be laid off. Also, a person can be an entrant or reentrant into the labor force.
If the unemployment rate is 10% and 90 million workers are employed, how many are unemployed?
- 10 million.
What is the main cost associated with cyclical unemployment?
- The loss due to decreased output.
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