ANSWER ALL OF THE FOLLOWING QUESTIONS WITH MORE THAN A FEW SENTENCES PLEASE 1. W

Question

ANSWER ALL OF THE FOLLOWING QUESTIONS WITH MORE THAN A FEW SENTENCES PLEASE

1. Why might you expect individuals who were unemployed in their 20s to have lower wages at the age of 40 than individuals with identical educational backgrounds but who were not unemployed?

2. The starting salary for a new assistant economics professor was $15,000 in 1976 and $90,000 in 2010. The value of the CPI for 2010 was 216.3, compared to 56.9 in 1976. In which year did a newly hired professor earn more in real terms?

3. A country reports a price index of 55 in 2005 and 60 in 2006. What is the inflation rate between 2005 and 2006?

4. How do you think the internet and online shopping would affect the menu costs of inflation?

Explanation / Answer

Solution:

1) Persistent unemployment cause loss of job skills. Hence people who were unemployed in their 20s have lower wages when they become older as they don’t carry potential skills as compared to those who were not unemployed in their 20s.

2) Calculate the Real wage rate using the following formula:

Real wage in a year = (Nominal wage in a year/CPI in a year) X 100

Therefore,

the real wage in year one is equal to ($15,000 / 56.9) x 100 = $26,362.038. The real wage in year two is equal to ($90,000 / 216.3) x 100 = $41,608.876.

The real wages increased from $26362.038 to $41,608.876.

3) Inflation = ((Price Index in Current Year – Price Index in Base Year)/Price Index in Base Year)*100

                = ((60-55)/55)*100

                = 9.09%

Therefore, from 2005 to 2006, inflation has risen 9.09%.

4) Internet and online shopping is typically associated with lower costs and prices. It creates higher competition which affects the aggregate price level thus lowering inflation. Additionally, e-business enables firms to adjust prices or reduce “menu costs” in the wake of economic shocks.

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