What economic functions do rent, interest, and profit payments perform? How effective are they in performing these functions?
What will be an ideal response?
Rent performs an allocation function since it is the income earned on a fixed resource whose supply cannot expand with higher rents. Thus, differential rents allocate the existing amount of the resource to its highest and best use as determined by who is willing to pay the price or rent. [text: E p. 363; MI p. 363]
Interest rates affect both the level and composition of investment. The supply of and demand for loadable funds determine the interest rate and thus help to determine the level of investment. The cost of capital, or the interest rate, then allocates capital to its most productive uses. This is true except where monopoly power enables some firms to pay the higher interest rates because they have the power to raise prices to cover the additional cost. [text: E pp. 371; MI pp. 371]
Profits also perform both incentive and allocation functions. Resources will flow to profitable pursuits, and the expectation of profits provides the incentive for innovation and risk-taking that is essential to the capitalist process. Where profits are due to monopoly power, the process is not allocating resources as efficiently as society would choose.
You might also like to view...
The main argument against Fed independence is that
A) in a democracy elected officials should make public policy. B) monetary and fiscal policy would be easier to coordinate if the Fed were not independent. C) the Fed has proven irresponsible on many occasions. D) congressional control was tried during the 1960s and it worked well.
When buying a car from a commission salesman you improve your bargaining position by
a. shopping when the new model year cars have just arrived b. shopping when the showroom is full of customers c. shopping when the car lot has many cars left unsold d. shopping toward the beginning of the month
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000 . If Samantha is offered a full coverage insurance policy for her house at $2000, would she buy the insurance?
a. Yes because she gets to now enjoy her wealth risk-free b. No, because she can take the risk and be better off c. Yes, because she gains on average with the insurance d. Both A&C
The Phillips Curve shows the trade-off between:
a. unemployment and output. b. inflation and output. c. unemployment and inflation. d. imports and exports. e. unemployment and imports.