Author Question: For this question, suppose the domestic interest rate is 4 and that the foreign interest rate is 7. ... (Read 148 times)

cmoore54 · **on:** Jun 30, 2018

For this question, suppose the domestic interest rate is 4 and that the foreign interest rate is 7. And finally, assume that the domestic currency is expected to depreciate by 3 during the coming year. Given this information, we know that

A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) the interest parity condition holds.

Question 2

Graphically illustrate (using the WS and PS relations) and explain the effects of an increase in the minimum wage on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.

What will be an ideal response?

triiciiaa · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

An increase in the minimum wage will cause the nominal wage based on wage setting behavior to increase; this is represented as an upward shift in the WS relation. As the nominal wage increases, firms will respond by increasing the price level so we will observe no change in the equilibrium real wage. We will observe an increase in the natural rate of unemployment and a reduction in both the natural level of employment and output.