Explain how we can estimate the shape of a person's indifference map by observing choices under different economic circumstances. Explain also why we will not be able to identify any non-convexities in tastes from our observations.
What will be an ideal response?
The reason we can identify the shape of indifference maps from choices is that we know that, at any interior solution, the MRS is equal to the negative price ration. So, if we observe an interior choice at a given set of prices, we know what the MRS is at that bundle. If we observe enough of these bundles with associated MRS, we can estimate the shape of indifference curves. But no choice is ever made along non-convex portions of indifference curves --- which means we can never identify the shape of non-convexities if they are there.
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A) the UK's net factor payment from abroad will fall B) there will be a deficit in U.S.'s financial account C) the U.S.'s net exports will increase D) the U.S.'s net transfer payment will increase
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Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:
A. 3.5. B. 4.5. C. 6.5. D. 3.0.
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A. Operation twist B. Precommitment strategy C. Dodd-Frank Act D. Quantitative easing