Assignment 3

Pg 500


a) For the first year Frank should charge Sarah a 12% nominal interest rate. (Increase in inflation + real return expected =10+2=12%)

For the second year Frank should charge Sarah a 23% nominal interest rate. (Increase in inflation + real return expected =21+2=23%)

b) To not allow the change in inflation to have any effect on the 2% real rate of return Frank wants, he should increase the nominal interest rate so that inflation does not have any effect on the real rate of return.


a) I feel that this sentence is correct because with the improvements in technology and more efficient and effective ways of producing goods and services the cost of these items fall over time.

b) Great Britain was the centre of economic activity. They promoted free trade policies and this allowed merchants to trade their goods thereby opening up many more opportunities for international trade. This got investors investing in high-risk ventures such as railroads and communication networks thereby increasing direct foreign investment. A lot of immigrants left their respective countries and headed towards the more industrialized nations. Since there was so much exchange going on between the various countries there had to be someway to promote international price stability. It was then that the international gold standard came into being. The gold anchor facilitated foreign commerce and investment. This also allowed entrepreneurs to have a higher confidence in the value of currencies. This lead to the era of laissez-faire where there are free markets, a small government and monetary stability. In the latter parts of the 19th century industrialized countries like Britain, the U.S. and Canada were producing many more goods because of the more effective ways of production. Therefore too little money was being spent on a lot of goods. This lead to an increase in the demand of gold and a number of countries joining the gold club.

c) Workers in the major industrialized nation are saving more and more cash into private organizations. With the interest supposed to continue to stay low investors are more willing to invest in high-risk ventures in emerging markets.

Employment growth will be strong but not strong enough to meet the demands of the employer. Even though a lot of people feel that they will continue to work even after retirement employers still feel that there will be a labor shortage.

The number of people living in poverty should decrease and the unemployment rate should fall as well because of the willingness of seniors, minorities and women to work.

The balance of power will shift from the government to large markets thereby allowing companies to easily build and keep their earnings. On the global scale this would lead to freer trade among nations and allow entrepreneurs to have access to bigger markets.

With prices free of distortion or inflation companies would now be able to value the goods and services they sell.

With people becoming more knowledgeable and being able to apply what they have learnt to real world has helped organize factory growth and regulate government policies.

Pg 472

Q8) Labor force = Number of employed + unemployed workers in an economy

= 25+5+2

= 32

Unemployment rate = No. of unemployed people/labor force

= 2/32

= 0.0625 or 6.25%

Participation rate = Labor force/Working age population

= 32/55

= 0.5818 or 58.18%