It is generally claimed that state trading, or centrally controlled trading will tend to reach a lower economic welfare than would be reached by allowing market forces to determine trade flow directions and terms of trade
Illustrate a counter-example to this proposition.
In general, if we begin with any suboptimal distortion, the theory of the second best tells us that an additional "distortion" may move a country in the correct direction of a welfare improvement. For example, If a country has an overvalued exchange rate (that is, its currency is overpriced in the foreign exchange markets), it is possible that it will find itself in an autarkic equilibrium (that is, it might "overprice itself out of the international market"). In such a case it is easy to demonstrate that if the government exports the goods in which the country enjoys comparative advantage, and imports the other (bypassing market prices and mechanisms), the country's economic welfare will improve.
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Which monetary policy rule needs a stable demand for money to work well?
A) inflation targeting rule B) nominal GDP targeting rule C) k-percent rule D) discretionary monetary policy E) monetary base instrument rule
Figure 5-11
In Figure 5-11, a consumer is initially at point A. There is a price change and she moves to B. It follows that
a.
the demand for beer follows the law of demand.
b.
the demand for beer does not follow the law of demand.
c.
wine is an inferior good.
d.
the consumer is confused.