There Is an Election Coming Up AIf the Conservatives Can Move First,what Will Be the Outcome

question 74

Short Answer

There is an election coming up.Conservatives are currently in government,and will be able to raise more money for the next election campaign if they keep interest rates and unemployment low.Conservatives can persuade firms whether or not to raise prices;Liberals can persuade the Bank whether or not to increase interest rates.The amount of money raised by each party and the resulting inflation and unemployment rates are given below.
$$\begin{array} { l l l } & \text { Raise prices } & \text { Don't raise prices } \\\hline \text { Conservative strategy } & \text { Outcome A } & \text { Outcome B } \\\text { Raise } r & \text { Cons.: \$40 } & \text { Cons.: \$80 } \\& \text { Libs.: \$60 } & \text { Libs.: \$20 } \\& \pi = 8 \% & \pi = 0 \% \\u = 8 \% & u = 6 \% \\\text { Liberal strategy } & & \\& \text { Outcome C } & \text { Outcome D } \\\text { Don't raise } r & \text { Cons.: \$20 } & \text { Cons.: \$60 } \\& \text { Libs.: \$80 } & \text { Libs.: \$40 } \\& \pi = 12 \% & \pi = 4 \% \\u = 9 \% & u = 8 \%\end{array}$$
a.If the Conservatives can move first,what will be the outcome of this game?
b.Now suppose the Liberals move first.What will be the outcome?
c.Suppose the roles are reversed and Liberals can influence prices,while Conservatives influence the money supply.What is the outcome if Liberals move first? If Conservatives move first?

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Definitions:

Financing Activities

Transactions and business events that affect long-term liabilities and equity of a company, including issuance of shares, buyback of shares, and loans taken or given.

Operating Activities

Business activities directly related to the production and delivery of goods and services.

Depreciation

The process of allocating the cost of a tangible asset over its useful life, reflecting the asset's wear and tear, deterioration, or obsolescence.

Accounts Payable

Liabilities of a business that represent amounts owed to creditors for goods and services the company has received but not yet paid for.