Answer to Question #142066 in Macroeconomics for Samira

Question

Suppose inflation expectations of individuals increase by one percentage point for every five percent increase in the current price level of apples. Further assume that real money demand of individuals decreases by one percent for every two percentage point increase in nominal interest rate. Then, what should be the increase in nominal wage rate in long run with a sudden ten percent increase in money supply?

Need clear and mathematical economic answer

Answer 1

This question requires theoretical knowledge of microeconomics. Inflation refers to the persistent and considerable rise in the general price level over a certain period of time. In the given case, the rise in nominal wage in the long with ten percent increase in money supply does not affect the real wage rate or purchasing power. However, the nominal interest rates are increasing. This point reveals that as the nominal wage increases, the real wage will decrease. To overcome this situation, the monetary and fiscal policies must exist, and they include open market ration, bank rate policy, and cash receipt ratio.