Question

Discuss any one of the reasons for a mutually beneficial transaction not 2. (8 marks taking place in the labour market. Is it possible to solve the problem by government intervention? If so, how? 3. (6 marks) Suppose the nominal weekly wage rate in years 2004 and 2005 were $500 and $525 respectively, while the Consumer Price Index increased from 120 in 2004 to 126 in 2005. Are the workers better-off, worse-off, or as well-off in year 2005 compared to year 2004? Justify your position.

Answer 1

Solution 2

One of the most mutually beneficial decisions is creating full employment levels which generally does not takr place in market due to fact that inflation shall rise exponentially if this occurs. Government can solve this problem by raising income taxes and also moving economy towards full employment such that inflation remains in well under control.

Solution 3

Since the CPI Inflation has grown and so have the wages which means the situation is neither worse off nor better off because rise in wages has been rendered with an almost equal rise in CPI Inflation and hence savings remain almost constant. Hence, economy hasbeen well off in 2005.