Explain how inflation can lead to distortions
What will be an ideal response?
First, not all prices and wages adjust automatically when inflation occurs. Second, variations in relative prices (which occur when there is not pure inflation) can lead to uncertainty. Inflation can also lead to distortions if the tax system is not adjusted when inflation occurs (e.g. nominal income tax brackets).
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When there is no market for a negative externality, the producer of the externality _____
a. has strong incentive to consider the costs it imposes on others b. will try to create a market c. will limit production of the good producing the externality d. has no incentive to consider the costs it imposes on others
The financial amount that a risk averse person requires to take on risk is called:
a. risk arbitrage. b. risk bonus. c. risk premium. d. risk capital. e. risk rate.