If the production of a particular good involves significant external costs, to force the externality to be internalized the government might:
a. impose a tax on production of the good in order to increase production.
b. impose a tax on production of the good in order to decrease production.
c. offer a subsidy for production of the good in order to increase production.
d. offer a subsidy for production of the good in order to decrease production.
Question 2
According to rational expectations theory:
a. a large reduction in unemployment can be achieved with a relatively small increase in inflation.
b. people are not easily fooled by changes in government fiscal policy.
c. inflation rates that rise 3 percentage points each year will keep unemployment below its natural rate for a sustained period of time.
d. the Phillips curve will slope downward to the right, if people correctly anticipate the inflation rate.
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