What is meant by the "law of one price"? In discussing the law of demand, Hubbard and O'Brien claim there has been no evidence of an exception to the law (that is, no evidence of an upward-sloping demand curve)
Are there exceptions to the law of one price?
The law of one price states that identical products should sell for the same price everywhere. But this law refers to a tendency for prices to be equal in different locations, not that such differences never occur. If identical products do sell for different prices in different locations arbitrage profits can be earned by people who buy where the price is low and sell where the price is high. Arbitrage will eventually cause prices to move toward equality, but the law of one price will hold exactly only if transactions costs associated with arbitrage trade are zero. If there are transactions costs, price differences will persist.
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Estimation of dynamic multipliers under strict exogeneity should be done by
A) instrumental variable methods. B) OLS. C) feasible GLS. D) analyzing the stationarity of the multipliers.
If the price of ground beef falls, the demand for hamburger buns will
a. increase because the two goods are substitutes b. decrease because the two goods are complements c. decrease because the two goods are substitutes d. increase because the two goods are complements e. not change unless the price of hamburger buns also changes
The multiplier can be calculated by dividing:
A. the initial change in spending by the change in real GDP. B. one by one minus the marginal propensity to save. C. one by one minus the marginal propensity to invest. D. the change in real GDP by the initial change in spending.
Specialization can occur because
A. governments pass laws that require it. B. varying skills differentiate workers. C. managers and laborers share job tasks. D. absolute advantage creates specialization among laborers.