Describe the different types of internal shocks to an economy, and link them to the curves in the Mundell-Fleming model.
What will be an ideal response?
POSSIBLE RESPONSE: One type of internal shock arises in the market for money. A domestic monetary shock alters the equilibrium relationship between money supply and money demand because (1) the money supply changes or (2) the way in which people decide on their money holdings changes. The latter can arise, for instance, from financial innovations like money market mutual funds, the spread of credit cards, or automated teller machines (ATMs). A domestic monetary shock causes a shift in the LM curve.
Another type of domestic shock arises from exogenous changes in domestic spending on goods and services. A domestic spending shock alters domestic real expenditure through an exogenous force that alters one of its components (consumption, real domestic investment, or government spending). A change in fiscal policy is one such shock. Another would be a change in the business mood or consumer sentiment, resulting in a change in real investment or consumption spending. A domestic spending shock causes a shift in the IS curve.
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The most important characteristic that differentiates one market structure from another is the
a. time it takes for new firms to enter b. amount of short-run economic profit c. degree to which goods complement each other d. number of producers selling in the market e. barriers to entry
Determine the retail disposal charge that will produce an efficient allocation of antifreeze.
Suppose you are a public official responsible for setting a retail disposal charge on antifreeze. Estimated marginal benefit and cost functions for antifreeze are as follows: MPB = 10.0 – 0.5Q MPC = MSC = 1.0 + 0.4Q MSB = 10.0 –1.1Q, whereMPB, MSB, and MPC are measured in dollars per gallon, and Q is in millions of gallons.
Sheila sells corn in a perfectly competitive market. This month Sheila receives a lower price for a bushel of corn than she did last month. This might have happened because:
A. the market demand increased for corn. B. the market demand decreased for corn. C. firms exited the market. D. Sheila's costs have increased.
To produce financial stability, the Federal Reserve would want to
A. sell bonds during a recession and buy bonds during an economic boom. B. raise the money supply and cut interest rates during a recession to stimulate spending. C. increase the money supply during an economic boom and reduce the money supply during a recession. D. raise the interest rate during a recession to prevent excessive borrowing and increase income for struggling banks.