True, False, or Uncertain? Explain with words and graphs. If statement is false, say why it is false, and what is the truth. If it is true, explain why it is true. If it is uncertain, explain what would have to be the case for the statement to be true. Study Guide WCPC ECON 301 Intermediate Macroeconomics Summer 2009 Wages, Unemployment, Inflation, and Aggregate Supply ω󰇛󰇜 ω 󰇛󰇜 󰇟󰇠 󰇡󰇢 󰇡󰇢 The Wage Curve 1. In wage negotiations, wage raises are endogenously determined and expected inflation is an exogenous determinant. 2. In wage negotiations, wage raises are endogenously determined and inflation is an exogenous determinant. 3. In wage negotiations, inflation is endogenously determined and wage raises are an exogenous determinant. 4. In wage negotiations, wage raises and inflation are endogenously determined. 5. Workers increase their wage demands in response to higher unemployment as a compensation for tougher economic times, that is, in order to keep their standard of living constant. 6. Workers reduce their wage demands in response to higher unemployment as a result of labor’s weaker bargaining position. 7. Firms accept higher wage demands in response to higher unemployment as a result of owners’ weaker bargaining position. 8. Firms obtain lower wage demands when unemployment rises because recessions increase owners’ options in wage bargaining. 9. Higher expected inflation causes workers to demand faster raises in order to keep a constant standard of living. True, False, or Uncertain? Explain with words and graphs. If statement is false, say why it is false, and what is the truth. If it is true, explain why it is true. If it is uncertain, explain what would have to be the case for the statement to be true. 10. Higher expected inflation causes workers to accept slower raises because of correspondingly lower actual inflation. 11. Higher expected inflation causes firms to resist wage demands as a compensation for higher expected costs of non‐labor inputs. 12. Higher expected inflation causes firms to accept faster wage raises because they expect to be able to pass on the costs to consumers. 13. Higher actual inflation increases wage‐raise demands. 14. Higher actual inflation has no direct effect on wage‐raise demands. 15. Higher actual inflation reduces wage‐raise demands. 16. Anything that reduces the costs of unemployment (e.g., lower psychological trauma, less social stigma, smaller loss of income due to unemployment insurance) leads to higher wage demands because workers have less to lose. 17. Anything that reduces the costs of unemployment (e.g., lower psychological trauma, less social stigma, smaller loss of income due to unemployment insurance) leads to requests for smaller raises because workers are compensated in other ways. The Price Curve 1. In price‐setting negotiations, wage raises are endogenously determined and inflation is an exogenous determinant. 2. In price‐setting negotiations, inflation is endogenously determined and wage raises are an exogenous determinant. 3. In price‐setting negotiations, inflation and wage raises are endogenously determined. 4. When setting prices, firms take into account costs of production and competitive considerations. If a market is very competitive, firms will have sma ller profit margin. True, False, or Uncertain? Explain with words and graphs. If statement is false, say why it is false, and what is the truth. If it is true, explain why it is true. If it is uncertain, explain what would have to be the case for the statement to be true. 5. When setting prices, firms take into account costs of production and competitive considerations. If a market is very competitive, firms will be able to pass on costs more easily. 6. Faster productivity growth gives firms more pricing power and allows firms to raise their prices more quickly. That is, inflation rises when productivity grows faster. 7. Faster productivity growth allows firms to pass on the cost savings to consumers. That is, inflation falls when productivity grows faster. 8. Higher non‐labor costs, for a given rate of wage raises, force firms to increase their prices more quickly (higher inflation) in order to keep profits constant. 9. Higher non‐labor costs, for a given rate of wage raises, weaken the bargaining position of firms, reducing their pricing power and lowering inflation. 10. Greater wage demands lead to higher inflation as firms try to pro tect their profit margins, at any level of unemployment. 11. Greater wage demands lead to lower inflation. When workers are more demanding, unemployment rises, which forces firms to moderate their price increases. 12. Higher expected inflation causes firms to increase their prices faster. 13. Higher expected inflation has no direct effect on firms price‐setting decisions. 14. Higher expected inflation causes firms to increase their prices more slowly. Labor Market Equilibrium and the Natural Rate of Unemployment 1. In labor‐market equilibrium, wage raises are endogenously determined and inflation is an exogenous determinant. 2. In labor‐market equilibrium, inflation is endoge nously determined and wage raises are an exogenous determinant. 3. In labor‐market equilibrium, inflation and wage raises are endogenously determined. True, False, or Uncertain? Explain with words and graphs. If statement is false, say why it is false, and what is the truth. If it is true, explain why it is true. If it is uncertain, explain what would have to be the case for the statement to be true. 4. Labor‐market equilibrium is found at the level of unemployment that makes wage‐raise decisions consistent with i nflation‐setting decisions. If labor obtains wage raises so large (, perhaps because of a strong labor bargaining position) that firms become uncompetitive (given the rate of inflation), the result will be slower hiring, layoffs, and bankruptcies. Then unemployment will rise (), encouraging workers to accept smaller raises (). On the other hand, if wage demands are relatively small (, perhaps because workers’ expectations of inflation were too low, ), firms will be able to pass on