1) Explain the difference between consumption possibilities and production possi

Question

1) Explain the difference between consumption possibilities and production possibilities. How it is possible for a country to consume a greater quantity of goods and services than it is actually capable of producing?

2) If more teenagers stay in school longer rather than dropping out and entering the labor force,
   A.   The unemployment rate goes up.
   B.   The production possibilities curve remains unchanged.
   C.   The production possibilities curve shifts outward.
   D.   The production possibilities curve shifts inward.

3) Describe the two protective mechanisms used to protect the economy against inflation. Who is hurt and who is helps by each of the protective mechanisms? Why?

4) Describe the 3 factors that impact the shape of the aggregate demand curve.

5) Describe Rostow's 5 Stages of Development. What stage is the US in today?

6) Which of the following possible in-kind transfers do you think raises the "true" incomes of recipients the most: a) free golf lessons; b) free public transportation on public buses; or c) free food? Why?

7) How do government programs that provide benefits for the poor (such as food stamps and subsidized housing) change the incentives of people to be classified as "poor"? Explain.

Explanation / Answer

4)

3 theories

1.International effect as the price of American goods increases, Americans purchase relatively more foreign goods, exports fall, imports rise, GDP falls.

2.Asset effect the purchasing power of individuals (which is based on their wealth) falls. They are unable to buy as much so consumption falls.

3.Interest rate effect as prices rise interest rates rise, typically when interest rates rise investment falls and consumption falls.

The first reason for the downward slope of the aggregate demand curve is Pigou's wealth effect. Recall that the nominal value of money is fixed, but the real value is dependent upon the price level. This is because for a given amount of money, a lower price level provides more purchasing power per unit of currency. When the price level falls, consumers are wealthier, a condition which induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby increasing the aggregate demand.

The second reason for the downward slope of the aggregate demand curve is Keynes's interest-rate effect. Recall that the quantity of money demanded is dependent upon the price level. That is, a high price level means that it takes a relatively large amount of currency to make purchases. Thus, consumers demand large quantities of currency when the price level is high. When the price level is low, consumers demand a relatively small amount of currency because it takes a relatively small amount of currency to make purchases. Thus, consumers keep larger amounts of currency in the bank. As the amount of currency in banks increases, the supply of loans increases. As the supply of loans increases, the cost of loans--that is, the interest rate--decreases. Thus, a low price level induces consumers to save, which in turn drives down the interest rate. A low interest rate increases the demand for investment as the cost of investment falls with the interest rate. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand.

The third reason for the downward slope of the aggregate demand curve is Mundell-Fleming's exchange-rate effect. Recall that as the price level falls the interest rate also tends to fall. When the domestic interest rate is low relative to interest rates available in foreign countries, domestic investors tend to invest in foreign countries where return on investments is higher. As domestic currency flows to foreign countries, the real exchange rate decreases because the international supply of dollars increases. A decrease in the real exchange rate has the effect of increasing net exports because domestic goods and services are relatively cheaper. Finally, an increase in net exports increases aggregate demand, as net exports is a component of aggregate demand. Thus, as the price level drops, interest rates fall, domestic investment in foreign countries increases, the real exchange rate depreciates, net exports increases, and aggregate demand increases.

Ans 5)

The Rostow's Stages of Growth model is one of the major historical models of economic growth. It was published by American economist Walt Whitman Rostow in 1960. The model postulates that economic growth occurs in five basic stages, of varying length:[1]

ans 3)

Governments intervene in agricultural trade by means of direct and indirect instruments (see Box 1) with various objectives, the most common being to raise tax revenue, to support producers' incomes, to reduce consumers' food costs, to attain self-sufficiency and to counter interventions from other countries. These instruments are analysed in the following sections.

Box 1: Main instruments of protection

3.1.1 Direct protection instruments

Direct protection instruments affect commodities as they enter international trade either as imports or exports. The most common ones are tariffs, import and export quotas and export taxes and subsidies.

Tariffs

A tariff is a tax levied on an imported good. Specific tariffs are levied as a fixed charge per unit of the import good, for example US$3 per barrel of oil.Ad valorem tariffs are levied as a percentage of the CIF price (see Box 2) of an import good, for example a 20 percent charge on the CIF price of a tractor. Tariffs may be fixed (a given charge per physical unit or a given percentage of the CIF price) or variable (charges vary according to the CIF price). The variable import levies used by the European Union (EU) on imported foodstuffs were an example of a variable tariff1.

Tariffs are the simplest and oldest form of trade policy instrument. Traditionally, they were used as a source of government revenue but they are mostly used today to protect particular home sectors from international competition by artificially increasing the domestic price of the imported good.

Box 2: CIF and FOB prices

CIF stands for COST, INSURANCE AND FREIGHT. It is the landed cost of an import good on the dock or other entry point in the receiving country. It includes the cost of international freight and insurance and usually also the cost of unloading onto the dock. It excludes any charge after the import touches the dock such as port charges, handling and storage and agents' fees. It also excludes any domestic tariffs and other taxes or fees, duties or subsidies.

FOBstands for FREE ON BOARD. It is the cost of an export good at the exit point in the exporting country loaded in the ship or other means of transport in which it will be carried to the importing country. It is equal to the CIF price at the port of destination minus the cost of international freight and insurance and the unloading onto the dock.

In the balance of payments and other trade statistics, imported goods are always valued at their CIF price and exported goods at their FOB price.

A tariff raises the price of imports to home consumers, increases government revenue, and tends to increase the price for domestic producers of the import-competing commodity, thus providing an incentive for them to increase production and replace imports. Tariffs, therefore, increase the income of producers and government at the expense of consumers, and tend to make the domestic production of the good greater than it would have been in the absence of the protective measure.

Direct interventions Indirect interventions Tariffs Exchange rate management Import and export quotas Commodity programmes Export subsidies Marketing supports Sanitary and phytosanitary restrictions Input subsidies and tax exemptions Long-term investment assistance

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