If the Economy Relies Entirely on the Market Mechanism to Answer

question 132

Multiple Choice

If the economy relies entirely on the market mechanism to answer the WHAT,HOW,and FOR WHOM questions,it tends to

• A)Overproduce goods that yield external benefits and overproduce those that generate external costs.
• B)Overproduce goods that yield external benefits and underproduce those that generate external costs.
• C)Underproduce goods that yield external benefits and overproduce those that generate external costs.
• D)Underproduce goods that yield external benefits and underproduce those that generate external costs.

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Definitions:

Fiscal Policy

Government policies regarding taxation and spending that are used to influence economic conditions, including stimulating or restraining economic growth.

Potential GDP

The highest level of Gross Domestic Product (GDP) an economy can sustain over a long period without increasing inflation, reflecting its full employment output.

Inflation

A widespread rise in prices and a decrease in the value of money.

Spending Multiplier

A concept in Keynesian economics that quantifies the effect of an increase in autonomous spending on the total economic output.