Exhibit 20-6 Money, investment and product markets
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In Exhibit 20-6, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?
A. By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall.
B. By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall.
C. By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall.
D. By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall.
Answer: C
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The equation MP L /P L = MP C /P C :
A. designates the MR = MC level of output. B. assumes imperfect competition in the hiring of labor and capital. C. is a sufficient condition for the maximization of profits. D. is a necessary, but not sufficient, condition for the maximization of profits.
SouthState Chemical Co. produces pine oil cleaners in a process that produces emissions that discolor the paint on nearby houses, although the emissions have been declared nontoxic to humans. a. Is the price for the cleaner likely to be allocatively efficient? Use a graphic illustration in your answer. b. If your answer to (a) is no, what is an appropriate government policy to correct the problem?
What will be an ideal response?