Author Question: The figure above shows the market for college education. Left to itself without any government ... (Read 121 times)

B · **on:** Jun 29, 2018

The figure above shows the market for college education. Left to itself without any government intervention, a competitive market would create a deadweight loss equal to

A) zero.
B) the area d.
C) the area a + c.
D) the area b + c.
E) the area b + d.

Question 2

What factors can start a cost-push inflation? What must the Fed's response be for the inflation to continue?

What will be an ideal response?

wilsonbho · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

C

Answer to Question 2

Cost push inflation starts with a decrease in aggregate supply, that is, a leftward shift of the AS curve. The decrease in aggregate supply can be the result of an increase in the money wage rate or an increase in the money price of other raw materials. In either instance firms' costs have risen and they respond by decreasing production, which decreases aggregate supply. The dilemma for the Fed is that the decreases in aggregate supply means that real GDP falls below potential GDP and the price level rises. If the Fed responds by increasing the quantity of money in order to increase aggregate demand and move real GDP back to potential GDP, the price level will rise still higher. And if the initial agent that raised costs responds to the higher price level by again raising its costs, then a cost-push inflation might well occur.