The Federal Reserve lowers interest rates. As a result, in the short run, real GDP ________ and the price level ________

To be valid, an economic model must:

A. include every activity which occurs in the real world. B. not be based on an abstraction of the real world. C. be able to predict events occurring in the real world. D. exclude any link to the real world.

Answer the following statement(s) true (T) or false (F)

1. A Pigou tax forces car manufacturers to internalize the cost of pollution. 2. Cap and Trade is so named because the government puts a “cap” on the amount of exports that domestic firms are allowed to “trade” with foreign nations. 3. A Cap and Trade system is more prone to error than a Pigou tax. 4. Pigou taxes are unnecessary in the presence of transaction costs. 5. Pigovian analysis indicates that a subsidy should be awarded when economic activity creates social benefits.