There Is an Election Coming Up A) Outcome a
B) Outcome B
C) Outcome C
D)

question 55

Multiple Choice

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 inflation and unemployment low. Conservatives can persuade firms whether or not to raise prices; Liberals can persuade the Bank whether or not to increase the money supply. The amount of money raised by each party and the resulting inflation and unemployment rates are given below. If the Conservatives can move first, what will be the outcome of this game? $$\begin{array} { l l l } & \text { Raise prices } & \text { Don't raise prices } \\\hline \text { Conservative strategy } & \text { Outcome A } & \text { Outcome B } \\\text { Raise } M & \text { Cons.: } \$ 40 & \text { Cons.: \$80 } \\& \text { Libs.: } \$ 60 & \text { Libs.: \$20 } \\& \pi = 8 \% & \pi = 0 \% \\& u = 8 \% & u = 6 \% \\\text { Liberal Strategy } & \text { Outcome C } & \text { Outcome } \mathrm { D } \\\text { Don't raise } & \text { Cons.: } \$ 20 & \text { Cons.: } \$ 60 \\M & \text { Libs.: \$80 } & \text { Libs.: \$40 } \\& \pi = 8 \% & \pi = 0 \% \\& u = 9 \% & u = 8 \%\end{array}$$

• A) Outcome A
• B) Outcome B
• C) Outcome C
• D) Outcome D

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Definitions:

Supply Function

A mathematical relationship that depicts how the quantity of goods supplied by producers changes in response to different factors, such as price.

Factor Price

The price paid for the use of a factor of production, such as labor, land, or capital, in the production of goods and services.

Marginal Cost

Marginal cost refers to the increase in total cost resulting from producing one additional unit of a good or service.

Total Revenues

The overall amount of income generated from the sale of goods or services before any expenses are subtracted.