Author Question: The nominal interest rate in Autarkia has risen sharply after a change in a government policy. How ... (Read 90 times)

Wadzanai · **on:** Jun 30, 2018

The nominal interest rate in Autarkia has risen sharply after a change in a government policy. How will this affect the economy if the wages in the country are downwardly rigid?

What will be an ideal response?

Question 2

Refer to Figure 18.3. In autarky, the maximum amount of pogo sticks that Livonia can produce is

A) 120. B) 100. C) 80. D) 40.

nanny · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

If the nominal interest rate in Autarkia rises sharply after a change in government policy, both consumption and investment will fall. As a result, labor demand will fall. If wages are downwardly rigid, this will lead to a large increase in unemployment. As more workers become unemployed, the number of mortgage defaults, household bankruptcies, and firm bankruptcies will increase. This, in turn, further reduces consumption and investment.

Answer to Question 2

B