PS2_Ans - (=(Nominal wage/CPI)100) Year CPI (1982-1984 =...

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Assessment 2 1 B 2 C 3 B 4 D 5 E 6 C 7 C 8 C 9 B 10 D Suggested explanations to selected questions: Q2 (A) has no effect to neither the unemployment rate nor the ‘true extent of joblessness’. (C&E) discouraged workers, who are not being regarded as ‘unemployed’ (see Q1), indeed represent a loss to society. Thus, their lack of enthusiasm to contribute implies that the unemployment rate underestimates the ‘true extent of joblessness’. (D) in this case, the unemployment rate overstate the true extent of joblessness. Q6 Remember, Nominal interest rate = Real interest rate + inflation rate By the same token, Nominal wage rate= Real wage rate + inflation rate, where real wage rate measures the purchasing power of one’s income. Q7 Step 1: Calculate the real average hourly earnings for each year.
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Unformatted text preview: (=(Nominal wage/CPI)100) Year CPI (1982-1984 = 100) Real Average Hourly Earnings 2001 100 10 2002 105 9.5238 2003 117 10.2564 Step 2: The rate of growth of real average hourly earning from 2002 to 2003 can be found by = ((10.2564-9.5238)/ 9.5238)x100% = +7.6923% Q8 This is a ‘substitution effect’ of inflation. When there’s inflation, the general price level (for all goods and services in an economy) increases but the increase might be different for different goods. Thus, people will switch to buy relatively fewer products that experience a stronger increase in price and vice versa. This substitution action will make the CPI overstates the ‘true extent of inflation’....
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