Briefly discuss different methods of allocating quota licenses to the importers by the government. Also explain the inefficiency implications of each method.
What will be an ideal response?
POSSIBLE RESPONSE: There are three different methods to allocate quota licenses to import. First, the allocation of import licenses on the basis of fixed favoritism implies that the government simply assigns the licenses to firms without competition, applications, or negotiations. In this case the importers who receive the licenses realize gains from the difference between the domestic and the international price of the product. This method does not create any additional inefficiency beyond the deadweight losses from the production effect and the consumption effect of the quota. Also, it does not generate revenue for the government. Second, revenue for the government will be generated if the licenses are allocated through an auction (or some other way in which the government is paid for the licenses). The auction is a bidding process in which firms compete for the licenses by specifying the amount they are willing to pay, and the licenses are awarded to the highest bidders. Importing firms are willing to pay to acquire licenses because they will realize gains from the difference between the domestic and the international price of the imported product. For this method, there is also little or no additional inefficiency beyond the deadweight losses from the production and consumption effects of the quota.
Third, the government can require firms to compete for the licenses in some way other than simple bidding or bribing. Resource-using application procedures include allocating the quota licenses on a first-come, first-served basis, or on the basis of demonstrating need or worthiness, or through negotiations. Resource-using procedures encourage rent-seeking activities and are wasteful. For the country as a whole, resource-using procedures are the most inefficient method because the resources used in rent-seeking are drawn away from producing something that is truly valuable for society, in addition to the inefficiency from the production and consumption effects of the quota.
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"Because monetary policy must be approved by the president of the United States, the president is chair of the Federal Open Market Committee." Analyze the previous statement—is it correct or incorrect?
What will be an ideal response?
If the exchange rate between two countries is expected to remain fixed at its current rate, then
A) output growth rates must be equal in the two countries. B) price levels must be equal in the two countries. C) inflation rates must be equal in the two countries. D) nominal interest rates must be equal in the two countries. E) none of the above