A handmade watch is valued at $5,000 in 2010, which is 2.5 times its value in 1970. The respective CPIs were 92 in 1970 and 170 in 2010.

Question 2 on Topic 4 (10 marks)
(a) A handmade watch is valued at $5,000 in 2010, which is 2.5 times its value in 1970. The respective CPIs were 92 in 1970 and 170 in 2010.
(i) Calculate the rate of inflation between 1970 and 2010. (2 marks)
(ii) Between 1970 and 2010, has this watch risen in price faster than at the rate of inflation? Show all workings and justify your answer. (4 marks)
(b) Due to COVID-19 negatively impacting your firm’s business, your boss has had to reduce your pay this year, yet your standard of living actually increased. How can this be so? Explain your thought process with respect to the concept of wages. (4 marks)
Question 3 on Topics 6 & 7 (15 marks)
(a) The economy is doing extremely well, and is growing faster than economists think it should. The finance ministry has advised the government to engage in a fiscal contraction to slowdown the economy. It suggests that this can be done by cutting spending on healthcare and education. The prime minister has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:
(i) Would cutting government spending on healthcare and education slowdown the economy immediately and will it also continue to slowdown the economy into the future? Your advise on this is ____________________ (provide your answer and justification on both the immediate and future impact. Feel free to use external resources to assist you in your answer if you prefer). (5 marks)
(ii) She has also heard that cutting spending reduces the level of debt and improves the budgetary situation, so this initial cut in government expenditure will eventually lead to a better economic outlook. She wants to know your opinion on this. Your advise is ____________________ (provide your answer and justification. Feel free to use external resources to assist you in your answer if you prefer). (5 marks)