Answer to Question #46136 in Macroeconomics for Geraldine

Question

1) Recently the government increased the minimum wage from $4,280 per week to $5,300 per week.
The inflation rate during the same period was 9%. What is the impact on real wages?

2) In each of the following cases, specify whether the change is an injection or leakage/withdrawal in
Jamaica’s circular flow of income? In each case also specify whether the change is an increase or
a decrease assuming ceteris paribus condition.

a. The government raises tax allowance?
b. The government cuts spending on roads?
c. Firms borrow more money in order to build-up their stocks in preparation for an anticipated rise
in consumer demand?
d. A depreciation in the exchange rate affect the popularity of visiting abroad during holidays?
e. Saving is affected by a re-distribution of income from the rich to the poor.
f. Consumers demand more goods that are domestically produced (but total consumption does
not change).
g. People invest more in building societies.

Answer 1

1) Recently the government increased the minimum wage from $4,280 per week to $5,300 per week.
The inflation rate during the same period was 9%.
Nominal change in wages was: (5300 - 4280)/4280*100% = 23.83%
So, the change in real wages was: 23.83 - 9 = 14.83%
2) In each of the following cases, specify whether the change is an injection or leakage/withdrawal in
Jamaica’s circular flow of income? In each case also specify whether the change is an increase or
a decrease assuming ceteris paribus condition.
a. The government raises tax allowance - circular flow of income will decrease.
b. The government cuts spending on roads - circular flow of income will decrease.
c. Firms borrow more money in order to build-up their stocks in preparation for an anticipated rise
in consumer demand - - circular flow of income will increase.
d. A depreciation in the exchange rate affect the popularity of visiting abroad during holidays - circular flow of income will decrease.
e. Saving is affected by a re-distribution of income from the rich to the poor - circular flow of income will increase.
f. Consumers demand more goods that are domestically produced (but total consumption does not change) - circular flow of income will increase.
g. People invest more in building societies - circular flow of income will increase.