Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________
A) fall; fall; deficit B) increase; fall; surplus
C) fall; increase; deficit D) increase; increase; surplus
B
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Suppose that the market price of good A equals the firm's cost of producing that good, but it does not reflect any costs imposed on society. Which of the following is FALSE?
A) The good is priced too low. B) An external benefit is associated with good A. C) Resources are over-allocated in the production of good A. D) Too much of good A is being produced.
Given the following formula for the Taylor rule:Target federal funds rate = natural rate of interest + current inflation + 1/2(inflation gap) +1/2(output gap) if the current rate of inflation is 5%, the natural rate of interest is 2%, and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:
A. 6.5%. B. 10%. C. 2.5%. D. 3.5%.