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1.Markets provide the efficient amount of a good or service when a. externalities are present b. monopoly exists. cpublic goods are present d. competition is present and externalities and public goods are absent,
2.
The following equations describe the economy of Northern Illinois:
C = 400+0.8(Y-T)
T = 250
I = 700 – 40r
G = 600
(M/P)d = 0.5Y – 150r
M = 3000
P = 3.0
a. What is the equation that describes the IS curve? (Express Y as a function of r.)
b. What condition is satisfied along the IS curve?
c. What is the equation that describes the LM curve? (Express Y as a function of r.)
d. What condition is satisfied along the LM curve?
e. What are the equilibrium levels of Y and r?
f. Calculate the levels of consumption, savings, and investment.
3. Continue with the same equations.
a. What is the value of the multiplier which corresponds to the simple multiplier (m=1/(1-MPC))?
b. Suppose government spending rises by 100. How much would the simple multiplier predict that Y would rise?
c. Using the above equations, how much does Y actually rise when G rises from 600 to 700?
d. Explain why your answers to parts b and c differ.
e. Illustrate your answer to part d on a graph.
3.Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce a. too much of both goods. b. too little of both goods. c. too much of the good that generates external benefits and too little of the good that generates external costs. d. too little of the good that generates external benefits and too much of the good that generates external costs.
1. d. Competition is present and externalities and public goods are absent.
2.Please use this google drive link to download the answer file.
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3.
Externality is when the bystander bears the cost or benefit of any activity. It is of two types ÷ positive and negative.
Positive externality is when the bystander bears the benefit of any activity. Here external benefit is provided and market produces too less of this product/services. To internalise this externality, government gives subsidy equal to external benefit. Eg- vaccination, education etc.
Negative externality is when the bystander bears the cost of any activity. Here external cost is produced. And market produces too much of the good. To internalise this externality, government imposes tax equal to external cost. Eg- pollution, tax on cigarettes etc.
Option d.
