Macro Economics 1

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Answer:

- Illustration:[pic 8]

- Explanation:

The standard economic theory suggests that the workers will optimize themselves when bound by limited resources to attain the career they desire. The efficiency wage theory is that firms paying above the equilibrium wage in order to attract the most skillful workers. This is a cause of unemployment because a high salary attracts a surplus of workers, but reduces the demand due to the expense of hiring. Therefore, the employees that are not as optimized compared to others will be unemployed for the company cannot afford to pay for all the supply of workers available.

Question 7: (2 points)

People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully.

Answer:

If both inflation and income grow at the same rate, this complaint is no longer valid. For example, one economy of a country is experiencing inflation. Yesterday, the price of chicken was $5 and today, it is $15. The price of chicken has tripled. If the people’s income does not grow or does not outgrow inflation, their purchasing power will be reduced and the complaint above becomes valid because people cannot afford to pay the same for a chicken with a limited salary. However, if the same growth rate of inflation applies to their income, people are able to buy a chicken the same as yesterday. They have more to pay for more. Therefore, the purchasing power of that nation’s people is not changed.

Question 8: (2 points)

Since real GDP is adjusted for inflation and nominal GDP is not, nominal GDP must always be higher than real GDP. Do you agree or disagree? Why? Explain in 100 words.

Answer:

- Nominal GDP is not always higher than Real GDP.

- Explanation:

When the economy is experiencing inflation, the price of goods and services of the current year is increasing, but the price of the base year is still the same. That leads to the fact that nominal GDP is higher than the real one. However, when deflation happens, the price of the current year decreases while the base year’s price remains constant, leading to nominal GDP becoming lower than real GDP. Furthermore, nominal GDP and real GDP of the reference of the base year can be equivalent to one another.

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Question 9: (3 points)

Answer:

A.

- The real median salary of the New York Yankees in 1982-1984 dollars:

+ Year 1989: $500,000.00 124/100 = $403,225.81[pic 9]

+ Year 2009: $5,200,000.00 216/100= $2,407,407.41[pic 10]

- The real median salary of the New York Yankees in 2009 dollars:

+ Year 1989: $500,000.00 x 216/124 = $870,967.74

+ Year 2009: $5,200,000.00 x 216/216 = $5,200,000.00

B.

- The percentage increase in the median salary of the Yankees from 1989 to 2009 in nominal terms:

940.00%[pic 11]

- The percentage increase in the median salary of the Yankees from 1989 to 2009 in real terms:

X100 = 497.37%[pic 12]

Question 10:

- Does this news clip deal with scarcity? Explain. (1 point)

Answer:

Yes, it does. Scarcity refers to the infinite wants of consumers conflicting with limited

financial resources available to these airline companies. Consumers want “competitive airfares” but airlines are limited to the financial resources. It is to say that they have to continually provide consumers with larger airplanes and cheaper airfares in order to compete with other companies. However, if the expenditure of the business eventually becomes larger than its income the businesses may be driven to bankruptcy.

- Describe the news story in terms of the trade-offs it presents. (1 point)

Answer:

To increase the quality of services and attract travellers, airlines companies are cutting down extra costs by reducing capitals such as jobs and airplanes. In this article, specifically, consumers want competitive prices for plane tickets but businesses are limited to the amount of costs that they can save. For instance, Qantas is shown to attempt to save by “axing of 5000 jobs and $2 billion of cost cuts as it seeks to revive its fortunes” in order to meet with their consumers’ demands for “competitive airfares”.

- Give at least two examples of a normative statement and a positive statement from this news article. (1 point)

Answer:

- Positive statement: Is a statement that is objective, meaning that it can be examined for accuracy and does not attempt to give a value judgement. Examples in this article are:

- ‘Customers want competitive airfares all over the world.’

- ‘Rivals Virgin Australia and Tiger Airways are boosting services, which will keep pressure on fares.’

- Normative statement: Is much more objectively ambiguous, or subjective, than positive statements. Examples stated in this article are:

- ‘Airlines have to be on the ball if they want to fill up the big planes.’

- ‘The consumer has never had it so good.’