Briefly explain what is referred to as the crowding-out effect.
What will be an ideal response?
An increase in government purchases stimulates aggregate demand. As the new spending takes place, income and real GDP will rise, which will cause households and firms to increase their demand for money to accommodate increased buying and selling. The increase in the demand for money will cause the interest rate to rise, assuming the money supply is constant. As a result of the higher interest rate, consumers may decide against buying a car, a home, or other interest-sensitive goods, and businesses may cancel or scale back plans to expand or buy new capital equipment. In short, the higher interest rate will choke off some private spending on goods and services, cause a decrease in consumption and investment spending, and as a result, the impact of the increase in government purchases may be smaller. Economists call this the crowding-out effect.
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A monopolistic competitor shuts down production in the short run if ________
A) marginal revenue equals marginal cost B) marginal cost equals average cost C) total revenues do not cover variable costs D) total revenues do not cover fixed costs
The Doing Business reports provide information on ________
A) the size of a country's national debt B) the rate of inflation C) the independence of individual central banks D) how easy it is to conduct business in different parts of the world
Suppose the price of a gallon of ice cream rises from $4 to $5 and the price of a can of coffee rises from $2 to $2.50 . If the CPI rises from 150 to 177, then people likely will buy
a. more ice cream and more coffee. b. more ice cream and less coffee. c. less ice cream and more coffee. d. less ice cream and less coffee.
In practice, regulatory boards try to set the price of a natural monopoly so that price covers a normal return on capital investment. As a result:
A. there is an incentive to use more equipment. B. the price of equipment should decrease. C. there is an incentive to use less equipment. D. the incentive to use equipment stays the same.