АСTVITY 4.2 CLASSIFYING GOVERNMENT ACTIONS Directions: Below is a list of the six economic functions of government, followed by a set of 12 (fic- titious) newspaper headlines. Decide which of the six economic functions is referred to, directly or by implication, in each headline. Classify each headline according to the six functions by writing in the letter of the economic function that best fits that headline. The Six Economic Functions: A. Maintain the Legal and Social Framework B. Maintain Competition C. Provide Public Goods and Services D. Correct for Externalities E. Stabilize the Economy F. Redistribute Income The Headlines: 1. Federal Reserve Raises Key Interest Rate 2. Congress Raises Tax Rates for Top Income Brackets 3. EPA Plan to Reduce C0, Emissions

The table below shows part of the aggregate demand schedule for smart phones in the country of Afluentia: Quantity demanded Price P QD $900 10,000 $700 14,000 i. Plot the demand curve for smart phones in Afluentia. Assume demand is linear. Calculate the price elasticity of demand when the price increases from $700 to $900 using the midpoint method. Make your calculations explicit. ii. All else being the same, what is Afluentia's total expenditure on smart phones when the price is $700? And when the price is $900? All else being the same, should Afluentia's suppliers charge $700 or $900 for a smart phone? Why? Explain briefly; show graphically and make your calculations explicit. iii. Now suppose younger people start also buying smart phones in Afluentia. This means 1,000 more smart phones are bought at any given price. As price increases from $700 to $900, is the price elasticity of aggregate demand now greater than, less than, or the same as it was in part (i)? Why? Explain briefly.…

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31 The Lucas Critique suggests that: a.Without knowing why poeple behave the way they do, empirical regularites are not reliable guides for formulating public policy. b.Empirical regularites are not reliable guides for formulating public policy. c.Empirical findings are useless. d.Theoretical findings are useless. e.Theoretical findings are not reliable guides for formulating public policy.