The interest rate is the opportunity cost of transferring spending power between time periods. However, the market mechanism may fail to provide adequately for future economic growth. List the reasons why a market might fail.
What will be an ideal response?
Baumol and Blinder list the following three reasons why there may be a failure:1. Government may manipulate the interest rate to achieve various objectives with little regard to the impact on investment for future growth.2. Persons may suffer from “a defective telescopic faculty”—they may not give adequate weight to the future and may wish to consume today instead of invest for tomorrow.3. Some decisions have irreversible consequences, such as destruction of a unique natural habitat. Once “developed,” it is gone forever. It may be unwise to leave these decisions to purely profit-driven motives.
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Assume that in an effort to help consumers, the government decides to reduce the amount of taxes it imposes on sellers of gasoline, that is, sellers are required to pay the government a smaller fee for each gallon of gas they sell
In the market for gas, this would have the effect of causing an increase in the supply of gas and a decrease in equilibrium price. Indicate whether the statement is true or false
Inelastic demand implies
A) that a one percent increase in price results in a smaller than one percent decrease in quantity demanded. B) that a one percent increase in price results in a larger than one percent decrease in quantity demanded. C) that a one percent cut in price results in a larger than one percent increase in quantity demanded. D) that a one percent decrease or increase in price induces no change in total revenue.