Explain why a subsidy is inefficient
What will be an ideal response?
A subsidy creates inefficiency because a subsidy leads to a lower price and increased production. Marginal social benefit equals the price and so the lower price signals that the marginal social benefit falls. And the increased production means that the marginal social cost of production rises. So at the level of production with a subsidy, the marginal social benefit is less than the marginal social cost and inefficiency is created.
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In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when
A) the expected future exchange rate decreases. B) the U.S. interest rate rises. C) people expect that the dollar will depreciate. D) foreign interest rates increase.
Why might the response of far-sighted consumers reduce the multiplier effect of an increase in government expenditures?
Debt service is the percent of:
A. GDP that is owed in debt. B. the total value of household debt that consumers pay in interest. C. the total value of household debt that banks pay to create the loans. D. disposable income consumers have to pay for their debts.
Corporations are able to raise large amounts of financial capital because
A) of the tax breaks corporations are given relative to partnerships or proprietorships. B) of the elimination of the problem of separation of ownership and control. C) of limited liability and the treatment of a corporation as an individual entity. D) of their greater ability to monitor the performance of decision makers.