Topics: Economics, Inflation, Monetary policy Pages: 4 (1085 words) Published: February 12, 2013
1. Why might efficiency increase when a company is privatized, that is, converted from government ownership to private ownership? Could efficiency decrease? When a company is privatized efficiency can increase. When the government owns the factors of production there is little opportunity or incentive to design better products or pursue new technology. Efficiency is simply getting the most from what you’ve got. … There is no guarantee that efficiency will always increase.

2. Do we need more or less government intervention to decide WHAT, HOW and FOR WHOM? Provide a specific example. Government intervention is necessary but, when the market mechanism is allowed to operate freely, prices will determine the mix of output to be produced, the resources to be used in the production process, and for whom the output is produced.

3. What is the specific market failure justification for government spending on (a) public universities, (b) healthcare, (c) trash pickup, (d) highways, (e) police? Would a purely private economy produce any of these services?

4. Why do people expect inflation to heat up when the unemployment rate approaches 4 percent? The Council of Economic Advisers pegged full employment at 4 percent unemployment. As the economy approached its production possibilities, labor and other resources would become scarce. As market participants bid for these remaining resources, wages and priced would start to rise.

5. Are people worse off when the price level rises as fast as their income? Why do people often feel worse off in such circumstances? People whose nominal incomes rise more slowly than the rate of inflation end up worse than people whose incomes increase at the same rates as price levels. People often feel worse off in such circumstances because even though their nominal incomes are increasing, their real income decreases.

6. If equilibrium is compatible with both buyers’ and sellers’ intentions, how can...
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