The socially optimal level of output of a good with an externality occurs when
a. the marginal private costs of production are equal to marginal private revenues
b. the firm maximizes its profits
c. the consumer maximizes his or her utility
d. the marginal social cost of production equals the marginal social benefit of the good
e. the firm is making a normal profit
D
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Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should
A) raise taxes by $200 billion. B) lower government purchases by an amount less than $200 billion. C) lower government purchases by $200 billion. D) raise taxes by an amount more than $200 billion. E) lower taxes by $200 billion.
If the Federal Reserve announces that its target for the federal funds rate is rising from 4 percent to 4.25 percent, how do you expect workers and firms to react?
A) If the Fed's announcement is not credible, workers and firms will not expect inflation to fall so they will reduce their consumption and investment spending, which will increase aggregate demand and reduce inflation. B) As long as the Fed's announcement is credible, workers and firms will reduce their consumption and investment spending, which will reduce aggregate demand and reduce inflation. C) As long as the Fed's announcement is credible, workers and firms will increase their consumption and investment spending, which will increase aggregate demand and inflation. D) Workers and firms will incorporate the increase in interest rates into their expectations of inflation, and they will expect inflation to rise as a result of Fed's policy announcement.