1. Sarah anticipates that the CPI will increase by 5% in 2009. She believes that
ID: 1213955 • Letter: 1
Question
1. Sarah anticipates that the CPI will increase by 5% in 2009. She believes that her performance in her job in 2008 warrants a 2% increase in salary in 2009. In 2008, she made $30,000 per year. What is the minimum she should accept in 2009 to get a 2% increase in her real salary? (Show calculations for credit)
a. $30,000
b. $32,100
c. $30,600
d. $31,500
e. $32,130
2. (a) Suppose a recession in Europe reduces European travel and tourism to Asia. All else equal, how will this affect the market for the Euro?
a. Demand for € decreases
b.Supply of € increases
c. Demand for € increases
d. Supply of € decreases
e. Both supply and demand decrease
2. (b) And what happens to the € as a result?
a. Depreciates
b. Appreciates
c. Remains the same
Explanation / Answer
1. b. $32,100
Nominal rate = real rate + inflation = 2% + 5% = 7%
= 30,000(1+0.07)
= 30,000*1.07
= 32,100
2. D. Supply for Euro decreases.
As, less people from europe travel to Asia , so there will be less demand for exchange of currency from euro to other currencies and supply of euro will decrease in forex market and euro appreciates.
2. b. Appreciates.
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