Question

True false or uncertain and explain in 3 sentences why?

1)An increase in world supply of crude oil will (at some point) lead to a decrease in the price of plastic. [Hint: Crude oil byproducts are an input to the production of plastic.]

2)The measured unemployment rate can only decrease if some of those unemployed get jobs and become counted as employed.

3)If the CPI increases from 150 to 153, the inflation rate is 2%. So if your savings account pays a nominal interest rate of 2% then the real interest rate on your account is 0%.

Answer 1

(1) True.

Increase in supply of oil will decrease the price of oil. Since oil is an input to production, lower price of oil will lower input cost, and firms will increase production of plastic. Supply curve of plastic will shift rightward, decreasing price of plastic.

(2) False.

Unemployment rate = Number unemployed / Labor force

Therefore, unemployment rate can decrease if number of unemployed falls, and/or if labor force increases (for example due to increase in immigrants joining labor force).

(3) True

Real interest rate = Nominal interest rate - Inflation rate

When Nominal interest rate equals Inflation rate, Real interest rate will be zero.