A change in which of the following variables will have no direct ...

[tatyanajohnson]

A change in which of the following variables will have no direct effect on domestic demand?
 
  A) domestic income
  B) foreign income
  C) government spending
  D) the interest rate (r)
  E) none of the above

Question 2

Explain how changes in the proportion of contracts that are indexed affect how a given change in monetary policy will affect economic activity.
 
  What will be an ideal response?

[lorealeza]

Answer to Question 1

B

Answer to Question 2

An increase in nominal money growth will increase the real money supply causing an increase in economic activity. As the proportion of labor contracts that are indexed increases, the effects of changes in unemployment on inflation would increase. A reduction in u will cause an increase in inflation. When inflation rises in a period, some contracts (those that are indexed) will call for an immediate increase in wages further increasing inflation within that period. As indexation becomes more prevalent, that secondary effect on inflation will be magnified. This magnification of the inflation effect will cause the real money supply to increase by a smaller amount and, therefore, reduce the output effects of a given monetary expansion.

[tatyanajohnson]

Correct answers!

[lorealeza]

Great! Please up vote