Author Question: Suppose that over the past decade, U.S. inflation is greater than that in Mexico. Further assume ... (Read 47 times)

luminitza · **on:** Jun 30, 2018

Suppose that over the past decade, U.S. inflation is greater than that in Mexico. Further assume that during this same period, the dollar appreciates relative to the Mexican peso. Given this information,

A) the real exchange rate remains unchanged.
B) the real exchange rate must decrease.
C) the real exchange rate must increase.
D) the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.

Question 2

Explain what effect an increase in the unemployment rate will have on the real wage based on: (1 ) the WS relation; and (2 ) the PS relation.

What will be an ideal response?

Hikerman221 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

An increase in the unemployment rate will decrease bargaining power, decrease the nominal wage, and therefore decrease the real wage based on wage setting behavior. Changes in the unemployment rate have no effect on the real wage based on price setting behavior.