Question

At full employment, an increase in the quantity of money (ceteris paribus) can start Select one: a demand-pull inflation, as can an increase in government expenditure. b. demand-pull inflation, but an increase in government expenditure cannot. C. cost-push inflation, but an increase in government expenditure cannot. d. demand-pull and a cost-push inflation, as can an increase in government expenditure. e. cost-push inflation, as can an increase in government expenditure. Safari Touch ID

Answer 1

At full employment asn increase in the quantity of money (ceteris paribus) will result in a demand pull inflation since, there will be more money in the hands of consumers which will raise the demand. This will not be cost-push inflation since there will not be increase in cost or supply side impact. On the other hand, at full employment an increase in government expenditure also raise the aggregate demand and hence result in demand pull inflation. However, when there is no full employment, an increase in government expenditure will increase real output with multiplier effect and may not have high inflationary impact. Since we are talking about full employment scenario, the correct option should be: (a) demand-pull inflation, as can an increase in government expenditure.

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Real interest rate = 3% and inflation is 4% => Nominal interest rate = 3%+4% = 7%.

50% of 7% will be taxed. Hence, nominal after-tax interest earned = 50% of 7% = 50% * 7% = 3.5%

Since inflation is 4%, real after-tax interest rate = 3.5% - 4% = -0.5%

Hence, the correct option is (d) -0,5 percent