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6. Assume that both union and management representatives agree to wage increases because they expect prices to rise 10 percent during the next year. Explain why the unemploy- ment rate will probably increase if the actual rate of inflation next year is only 3 percent.

6. Assume that both union and management representatives agree to wage increases because they expect prices to rise 10 percent during the next year. Explain why the unemploy- ment rate will probably increase if the actual rate of inflation next year is only 3 percent.

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model
Section: Chapter Questions
Problem 6CQ
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### Economics Questions and Analysis This section includes a series of thought-provoking economics questions designed to deepen your understanding of key economic principles and mechanisms. **6. Inflation and Unemployment Rate Correlation** - **Question:** Assume that both union and management representatives agree to wage increases because they expect prices to rise 10 percent during the next year. Explain why the unemployment rate will probably increase if the actual rate of inflation next year is only 3 percent. **7. Output and Long-Run Equilibrium** - **Question:** When actual output exceeds an economy’s full-employment output, how will the self-correcting mechanism direct the economy to long-run equilibrium? Why can’t the above-normal output be maintained? **9. Impact of Inflation Changes on Markets** - **Question:** How will (a) an unexpected 3 percent fall in the price level in the goods and services market differ from (b) 1 percent inflation when 4 percent inflation had been expected? What impact would (a) and (b) have on the real price of resources, profit margins, output, and employment? Explain. **10. Effects of Foreign Income Growth on Exports** - **Question:** Suppose that an unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for U.S. exports. What impact will this change have on the price? ### Detailed Analysis on Key Concepts **Question 6:** When unions and management agree to a wage increase in anticipation of a 10% rise in prices (inflation) but the actual inflation turns out to be only 3%, the result can be higher unemployment. This happens because the real wages (wages adjusted for inflation) will be higher than expected, leading to increased labor costs for employers. As a consequence, employers may not be able to afford to hire as many workers, potentially increasing the unemployment rate. **Question 7:** If actual output exceeds an economy’s full-employment output, the self-correcting mechanism involves adjustments in prices and wages. Higher output can lead to increased demand for goods, driving prices up and causing inflationary pressure. To counter this, wages may rise as well, increasing production costs and eventually reducing output back to the full-employment level. Above-normal output can't be maintained because these adjustments typically lead to a return to the economy's potential output or full-employment output in the long run. **Question 9:** A 3% fall in the price level (
Transcribed Image Text:### Economics Questions and Analysis This section includes a series of thought-provoking economics questions designed to deepen your understanding of key economic principles and mechanisms. **6. Inflation and Unemployment Rate Correlation** - **Question:** Assume that both union and management representatives agree to wage increases because they expect prices to rise 10 percent during the next year. Explain why the unemployment rate will probably increase if the actual rate of inflation next year is only 3 percent. **7. Output and Long-Run Equilibrium** - **Question:** When actual output exceeds an economy’s full-employment output, how will the self-correcting mechanism direct the economy to long-run equilibrium? Why can’t the above-normal output be maintained? **9. Impact of Inflation Changes on Markets** - **Question:** How will (a) an unexpected 3 percent fall in the price level in the goods and services market differ from (b) 1 percent inflation when 4 percent inflation had been expected? What impact would (a) and (b) have on the real price of resources, profit margins, output, and employment? Explain. **10. Effects of Foreign Income Growth on Exports** - **Question:** Suppose that an unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for U.S. exports. What impact will this change have on the price? ### Detailed Analysis on Key Concepts **Question 6:** When unions and management agree to a wage increase in anticipation of a 10% rise in prices (inflation) but the actual inflation turns out to be only 3%, the result can be higher unemployment. This happens because the real wages (wages adjusted for inflation) will be higher than expected, leading to increased labor costs for employers. As a consequence, employers may not be able to afford to hire as many workers, potentially increasing the unemployment rate. **Question 7:** If actual output exceeds an economy’s full-employment output, the self-correcting mechanism involves adjustments in prices and wages. Higher output can lead to increased demand for goods, driving prices up and causing inflationary pressure. To counter this, wages may rise as well, increasing production costs and eventually reducing output back to the full-employment level. Above-normal output can't be maintained because these adjustments typically lead to a return to the economy's potential output or full-employment output in the long run. **Question 9:** A 3% fall in the price level (
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