Question

In the last few decades the car manufacturing sector has found it difficult to compete with foreign car imports. High labor costs is one of the main reasons economist site as the lack of competitiveness for the car manufacturing industry. If there was modest inflation, how could it possibly help the car manufacturing industry in the United States compete with foreign car manufacturers?

Business loans would cost less for the U.S. car manufacturers.

It could allow real wages to downwardly adjust more easily.

In the last few decades the electronics manufacturing sector has found it difficult to compete with electronics from foreign competitors. High labor costs is one of the main reasons economist site as the lack of competitiveness for the electronics manufacturing industry. If there was modest inflation how could it possibly help the electronics manufacturing industry compete?

The consumers of the electronics have increased purchasing power.

It could allow real wages to downwardly adjust more easily.

Business loans would cost less for the U.S. electronics manufacturers.

The consumers of the cars have increased purchasing power.

In 1985 inflation in Israel reached a record 500%. How did this period of high inflation affect market adjustments towards equilibrium price and quantity?

Markets adjusted to equilibrium faster than before.

Markets adjusted to equilibrium more erratically and slowly.

Markets could not adjust to equilibrium.

The mid-1990s saw a rise in the use of mobile phones in the general population. The technology continued to improve in the early 2000s and in the mid-2000s smartphones revolutionized the way people communicated. The technology has changed very rapidly and improved the lives of consumers. With these rapid changes, what would you suspect has happened to the CPI calculation?

The CPI has overstated the cost of living because of income bias.

The CPI has understated the cost of living because of quality improvement bias.

The CPI has overstated the cost of living because of quality improvement bias.

Answer 1

For the subparts of this question, we should keep these equations in our mind

Real Interest Rate = Nominal Interest Rate - Inflation Rate. ......(1)

$Real Wages = Nominal Wages / Inflation$ .......(2)

Let's start.

1)

Modest Inflation can be advantageous in some situations,

• As our main concern, as per the question, is to reduce the high labor cost because it is the main reason for the lack of competitiveness of the car manufacturing industry.

Modest inflation makes it easier to change real wages (according to equation 2), which in turn decreases the burden on firms. For example, workers are generally reluctant to a nominal wage cut but during the inflation, their employer can increase wages at less than the rate of inflation so that the real wage is decreasing.

Let's understand it with numbers: Suppose the inflation rate in the U.S. is 0% and the employer wants to cut wages but he can't because it will decrease nominal as well as real wages. On the other hand, if the inflation rate is at 4% and workers want a pay hike, the employer can simply hike the wage between 0-3.9% which result in an increase in nominal wage and cutting in real wages. This will put less burden on the firm.

Hence option B is more suitable

2) Same reasons as mentioned in the above part.

Option B is more suitable.

3) The situation of such high interest rate is called Hyperinfllation.

In this instance, growth in the quantity of money is moderate at first but overtime quantity of money in economy starts growing faster and faster and so is inflation. It is due to the fact that people have too much money for too few goods.

Hence quantity supplied did not match quantity demanded and price rises rapidly.

Therefore market will move towards equilibrium more erratically and slowly.

4)The correct option is C because due to technology improvement Cpi overestates the cost of living because it increases life and usefulness of products.