Why will there be less crowding out of private spending by government spending the less sensitive consumption, investment, and net exports are to changes in interest rates?
What will be an ideal response?
Crowding out occurs when the increase in government spending increases real GDP and income which increases money demand, pushing up interest rates. The higher interest rates decrease (crowd out) private spending — consumption, investment, and net exports. The less sensitive consumption, investment, and net exports are to interest rates, the less they decrease as a result of the higher interest rates.
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Do interest rates fluctuate in response to the Fed's actions?
What will be an ideal response?
Refer to Pollutants. Suppose transactions costs preclude the possibility of private bargaining between the chemical plant and the farm. Which liability rule will not result in an efficient outcome?
A chemical plant's production adds pollutants to a stream which irrigates a farm's crops. The pollutants damage the farm's crops, increasing the firm's costs by $800 per month. The crop damage may be eliminated in two ways: the chemical plant can install a new filtering system costing $300 per month, or the farm can install a new irrigation system costing $600 per month. a. The chemical plant bears all liability for the crop damage. b. The farm bears all of the costs of the crop damage. c. The chemical plant bears 50% of the liability, while the farm bears the other 50% of the crop damages. d. The Coase Theorem guarantees that any assignment of liability will result in an efficient outcome.