Describe the three stages of economic analysis.
What will be an ideal response?
The three stages of economic analysis are formulation, optimization, and equilibrium. First, to formulate an economic problem, explicit assumptions about objectives and constraints must be made. The relevant tradeoffs can generally be expressed in terms of costs, so this formulation typically results in assumptions regarding the benefits and costs of various alternatives. Second, the economic problem that has been formulated must be solved. Economists assume people behave rationally, so this solution must be an optimal one and usually requires use of the equimarginal principle. The optimization step also includes a determination of how the solution changes when the constraints change. Third, an equilibrium concept, which takes into account the interrelationships among various agents' constraints, must be chosen. In the equilibrium, all agents are simultaneously optimizing. The equilibrium is used to predict the economic outcome resulting from the situation being studied.
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A perfectly contestable market is one in which there are excessive costs to entry and exit.
Answer the following statement true (T) or false (F)
An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ________ in the inflation rate, leading to a(n) ________ in output.
A. decrease; increase B. increase; increase C. decrease; decrease D. increase; decrease
Starting from long-run equilibrium, a large tax increase will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. recessionary; lower; potential B. expansionary; lower; potential C. expansionary; higher; potential D. recessionary; lower; lower
The demand curve facing the monopolistically competitive firm is:
A. flat. B. vertical. C. U-shaped. D. None of these statements is true.