Give an example where a government subsidy can correct an ...

[vHAUNG6011]

Give an example where a government subsidy can correct an externality. Explain how the subsidy would lead to a more efficient outcome.
 
  What will be an ideal response?

Question 2

During the Chinese experience with pegging the yuan to the dollar, the yuan was undervalued. As a result,
 
  A) the prices of Chinese exports were higher than they would have been without the peg.
  B) the equilibrium value of the yuan was below the pegged value of the yuan.
  C) there was a surplus of yuan on the market that the Chinese government had to purchase to maintain the peg, depleting China's reserves of dollars.
  D) there was a surplus of dollars on the market that the Chinese government had to purchase to maintain the peg.

[owenfalvey]

Answer to Question 1

Student responses will vary. The example should be of a positive externality. The subsidy lowers marginal cost leading to an increased supply and a lower price.

Answer to Question 2

D

[vHAUNG6011]

Excellent

[nyrave]

Gracias!