Using Figure 4.2, suppose point C represents the optimal mix of public and private goods for a society. The market mechanism is likely to result in a mix of output represented by point
A. C because the market mechanism is efficient.
B. B because the market mechanism tends to overproduce public goods.
C. F because the market mechanism is inefficient.
D. D because the market mechanism tends to underproduce public goods.
Answer: D
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If products C and D are close substitutes, an increase in the price of C will
A. tend to cause the price of D to decrease. B. shift the demand curve for D to the right. C. shift the demand curves for both products to the right. D. shift the demand curve for C to the left and the demand curve for D to the right.
Why might a developing country choose to peg the value of its currency to the dollar?
What will be an ideal response?
Within the IS-LM curve model, if the government cut taxes at the same time that there was an autonomous increase in investment demand, then
a. income would rise and the interest rate would fall. b. income and the interest rate would rise. c. income would rise but the effect on the interest rate is uncertain. d. the interest rate would rise but the effect on income is uncertain. e. the effects on both income and the interest rate are uncertain.
During very bad recessions, if demand rises, aggregate supply will rise in the form of higher _____.
Fill in the blank(s) with the appropriate word(s).