Question

the labor force equals the number of people
in the working - age population.
unemployed.
employed plus unemployed.
employed.
question 23
suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. if actual inflation turns out to be 7% over the loan contract period, then
borrowers lose 3% of the loan value.
lenders gain 3% of the loan value.
borrowers gain 1% of the loan value.
lenders gain 1% of the loan value.

Explanation:

First Question (Labor Force Definition)

The labor force is defined as the sum of employed and unemployed individuals. The working - age population includes those not in the labor force (e.g., retirees, students not seeking work), so it's not just the working - age population. Unemployed alone or employed alone don't represent the labor force.

Step 1: Recall the Fisher equation

The nominal interest rate $i$ is related to the real interest rate $r$ and expected inflation $\pi^{e}$ by the equation $i = r+\pi^{e}$. Here, $r = 4\%$ and $\pi^{e}=6\%$, so $i=4\% + 6\%=10\%$.

Step 2: Calculate the actual real interest rate

The actual real interest rate $r_{actual}$ is given by $r_{actual}=i-\pi_{actual}$, where $\pi_{actual} = 7\%$. Substituting $i = 10\%$ and $\pi_{actual}=7\%$, we get $r_{actual}=10\% - 7\% = 3\%$. But we can also think in terms of the difference between expected and actual inflation. The change in real value for borrowers and lenders depends on the difference between actual and expected inflation. The expected inflation was $6\%$, actual is $7\%$, so the unexpected inflation is $7\% - 6\% = 1\%$. Borrowers benefit from higher than expected inflation because they repay the loan with money that is worth less. So borrowers gain $1\%$ of the loan value (since the real cost of borrowing is lower by $1\%$).

Answer:

C. employed plus unemployed.

Question 23 (Interest Rate and Inflation)