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Chapter 20: Problem 2

During a period of deflation, which is likely to increase faster: nominal average hourly earnings or real average hourly earnings? Briefly explain.

Short Answer

Expert verified
During a period of deflation, real average hourly earnings are likely to increase faster than nominal average hourly earnings due to the increased purchasing power of money.

Step by step solution

01

Understand the terms Nominal and Real

Nominal income refers to the amount of money received in a given time period, without considering the effects of inflation or deflation. On the other hand, real income is the nominal income adjusted for inflation or deflation. It represents the purchasing power of the income.
02

Understand the effect of deflation

Deflation is a decline in general price levels. When deflation occurs, the value of money increases. Consequently, a given amount of nominal income can buy more goods and services than before.
03

Determine the effect of deflation on Real and Nominal Earnings

In a deflationary period, although the nominal income might remain unchanged, the real income will increase as the purchasing power of money increases. If the nominal average hourly earnings were to remain constant, the real average hourly earnings would increase at a faster rate due to increased purchasing power.

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Most popular questions from this chapter

How can inflation affect the distribution of income?

In April \(2016,\) the nominal interest rate on a one-year Treasury bill was 0.54 percent. From April 2016 to April \(2017,\) the consumer price index rose from 238.9 to \(244.2 .\) If you bought the one-year Treasury bill in April 2016, calculate the real interest rate you earned over the following 12 -month period. Given the results of your calculation, why were investors willing to buy Treasury bills in April \(2016 ?\)

What is the natural rate of unemployment? What is the relationship between the natural rate of unemployment and full employment?

If inflation is expected to increase, what will happen to the nominal interest rate? Briefly explain.

Which is a greater problem: anticipated inflation or unanticipated inflation? Briefly explain.
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