Explain why the higher real wage would fail to increase

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1. In the 1970s, nominal interest rates in the United States were quite high, while real rates were extremely low. Which group "wins" in this circumstance, lenders or borrowers? What might explain the willingness of the "losers" to accept disadvantageous loan terms?

2. A small business owner has a line of credit from a bank with a nominal interest rate of seven percent. For several years, the price level has been rising at an annual rate of two percent, but the owner has just read in the newspaper that economists expect next year's inflation rate to be four percent or more. Assume that this owner may either continue the line of credit at seven percent, or renegotiate to alter both the size of the credit and the interest rate. What reason might there be for the owner to keep the credit terms as is? What argument might justify changing the credit agreement?

3. In an effort to stimulate the economy suppose a government tried to mandate a real wage above the equilibrium real wage. Assuming that factor markets are otherwise free and competitive, explain why the higher real wage would fail to increase the share of labor income in national income.

Reference no: EM13160232

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