Describe the immediate short-run effect to the economy from an increase in government purchases, as well as the self-correcting mechanism that will restore long-run equilibrium.
What will be an ideal response?
The increase in government purchases will cause the dynamic aggregate demand curve to shift right. The immediate impact of this increase is to raise both current output and inflation. But, because current inflation exceeds expected inflation, expected inflation rises, shifting the short-run aggregate supply curve to the left. Eventually, current inflation rises and current output falls until the economy reaches the point at which the dynamic aggregate demand curve crosses the long-run aggregate supply curve. At that point, current inflation equals expected inflation and target inflation, while current output equals potential output.
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When the Herfindahl-Hirschman Index for an industry is
A) very small, the industry can be perfectly competitive. B) very large, the industry can be perfectly competitive. C) 10,000, the industry is perfectly competitive. D) very small, the industry can be a monopoly. E) above 5,000, the industry is considered not very competitive, and when it is below 5,000, the industry is considered very competitive.
Using the government as a means of redistribution generates equity at the cost of efficiency, in part because
A) the process of redistribution uses up some of society's resources. B) the process of redistribution creates new resources for society. C) redistribution creates new incentives to work for both rich and poor. D) redistribution would not take place otherwise.
Explain why the long-run average cost is typically U shaped.
What will be an ideal response?
Positive externalities arise when
A. a profitable firm is regulated. B. tax rates are reduced. C. an unprofitable firm is shut down. D. production of a good generates benefits that spill over to third parties.