What is the only factor that can continually increase in such a way as to bring about continued increases in aggregate demand, and thus bring about continued inflation? Give two reasons why government purchases cannot continually increase, and so cannot be the cause of continued inflation
The only factor that can continually increase and bring about continued inflation is the money supply. One reason that government purchases cannot increase continually is that there are real and political limits to government spending. The real limit would be 100% of GDP (where all resources in the economy are devoted to producing goods and services for the government). The political limit would likely be less than 100% of GDP, but it is a limit nonetheless. Either way, there is an upper limit to the amount of government purchases, beyond which further such purchases cannot be made. The second reason for a limit to government purchases has to do with crowding out. As the government spends more, many economists believe that private sector spending falls as a result. This leads to little, or no, change in aggregate demand.
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A shift of the supply curve of DVDs raises the price of a DVD from $9.50 to $10.50 a DVD and reduces the quantity demanded from 41 million to 39 million DVDs a month. The price elasticity of demand for DVDs is
A) 2 million DVDs a month per dollar. B) $1 per 2 million barrels a day. C) 0.5. D) 2.0.
Almost all economists agree that local and state governments should
a. eliminate subsidies to professional sports franchises. b. increase subsidies to professional sports franchises. c. copy economic policy from Washington, D.C. d. prevent companies from outsourcing work.
According to the signaling theory of advertising, consumers
a. pay little or no attention to which firms advertise and which firms do not advertise. b. are often more impressed by a firm's willingness to spend money on advertising than they are by the content of the advertisement. c. are often more impressed by low-cost advertisements than they are by high-cost advertisements. d. gain little or no information about product quality from advertisements.
Answer the following questions true (T) or false (F)
1. The producer's supply response under a cobweb adjustment response is based on the previous period price. 2. When firms cannot alter the price they face in the market, they are said to be price takers. 3. An outward shift in the demand curve in a perfectly competitive market will result in an increase in supply and make the demand curve more inelastic.