Question

Match each situation with the method of government intervention used to rectify it. Tiles price floor contraction fiscal policy price ceiling expansionary fiscal policy Pairs People have too much money, and there is a danger of inflation. The GDP has fallen to an all-time low, and there is low demand for most goods. Few farmers produce cotton because profits are at the equilibrium price. Prices of staple foods have shot up because of shortages after an earthquake.

Answer 1

The following list contains each of the situations matched with the most adequate govermental policy that can be established to deal with it

• People have too much money and there is a danger of inflation. The goverment should apply. The goverment should apply a contractionary fiscal policy. Increasing interest rates will reduce the availability of cheap money and will lead to a decrease in the amount of money in circulation. This will weaken the risk of inflation.
• The GDP has fallen to an all-time low, and there is low demand for most goods. The government should apply a expansionary fiscal policy if the aim is to boost demand. By decreasing interest rates, cheap money is pumped into the economy and it will likely private and public invesment and demand levels.

• Few farmers produce cotton because profits are at the equilibrium price. The government should apply a price floor to maintain the price of agricultural products over the equilibrium price, so that farmers are willing to produce if they can sell at that price. Otherwise, agricultural markets may lack supply of products.
• Prices of staple foods have shot up because of shortages after an earthquake. The goverment should apply a price ceiling in order to keep the prices of raw materials affordable to be able to overcome the disaster. Staples would be transformed into all type of goods that need to be accesible to everybody in such a situation.

Answer 2

People have too much money, and there is a danger of inflation. CONTRACTION FISCAL POLICY

The GDP has fallen to an all-time low, and there is low demand for most goods. EXPANSIONARY FISCAL POLICY

Few farmers produce cotton because profits are at the equilibrium price. PRICE FLOOR

Prices of staple foods have shot up because of shortages after an earthquake. PRICE CEILING