Slowdown in Russia’s economy

Answer the following questions to check your understanding of the story.

How do you expect conscription and emigration to change the Russian real wage rate?

Conscription and emigration ___________ and the real wage rate ________.

a) increase the supply of labor; falls

b) decrease the demand for labor; falls

c) increase the demand for labor; rises

d) decrease the supply of labor; rises

Wrong! - How would conscription and emigration influence Russia’s labor market? What will be the effect on the real wage rate? Why would conscription and emigration influence the demand for labor?

Good Job! - Conscription reduces the size of the civilian labor force. Russian emigration reduces the working-age population. Both of these factors decrease the supply of labor and the real wage rate rises.

What can we infer from the news clip about inflation in Russia?

Russian is experiencing __________.

a) zero inflation

b) positive inflation

c) deflation

d) an inflation rate greater than 18%

Wrong! - With 0% growth, how is the real wage rate changing? With the money wage rate increasing by 18%, is a deflation or zero inflation likely? We know in which direction the inflation rate is changing but do we know by how much?

Well Done! - The real wage rate is the nominal wage rate divided by the price level. With zero growth, the increase in the real wage rate is small and most of the 18% increase in money wages is from inflation.

Why did the money wage rate increase in Russia?

The money wage rate increased because ____________.

a) the real wage rate and the price level increased

b) the real wage rate and the price level decreased

c) the real wage rate decreased and the price level increased

d) the real wage rate increased and the price level decreased

Wrong! - What happened in the labor market? Did the real wage rate decrease? What happened to the inflation rate? Did the price level decrease?

Correct! - W is the money wage rate.

W/P is the real wage rate.

P is the price level.

W = W/P * P

We know that the real wage rate increased and the price level increased, so money wage rate increased.

What can the Russian central bank do to increase the growth rate and lower the inflation rate?

The Russian central bank can _____________ the inflation rate.

a) do nothing about the growth rate but it can lower inflation by lowering the interest rate below

b) increase the growth rate by making firms hire more workers but it cannot lower

c) do nothing about the growth rate but it can lower inflation by raising the interest rate above

d) increase the growth rate by making firms hire more workers and it can lower the inflation by raising the interest rate above

Wrong! - Can the central bank take actions to increase the growth rate? Can the central bank take actions to lower the inflation rate? How does a change in the interest rate influence consumption expenditure and investment?

That's Right! - The central bank can do nothing about growth but raising the nominal interest rate above the inflation rate creates a positive real interest rate, which slows consumption expenditure and investment and slows inflation.

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