Question

uppose Venezuela can produce petroleum at a lower opportunity cost because of its natural resources, and China can produce clothing at a low opportunity cost because of its population and level of industrial development.

Which statement below regarding comparative advantage is NOT true?

• China has a comparative advantage in clothing production.

• Venezuela can produce clothing at low opportunity cost.

• Venezuela has a comparative advantage in petroleum production.

• China can produce petroleum at high opportunity cost.

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Which statement below regarding monetary and fiscal policy is FALSE?

• If AD increases too much, prices will increase and AD will return to equilibrium.

• The inverse relationship between inflation and unemployment is known as the Phillips Curve.

• Expansionary policy causes AD to shift to the left.

• The situation where unemployment is high and inflation is high is stagflation.

Answer 1

1. The comparative advantage is defined in terms of opportunity cost , the country produces the good with lower opportunity cost than the other country has the comparative advanatage in the production of that particular good. The opportunity cost is also known as the implicit cost , it is the cost ocuurs when we choose between the alternatives. So the the country that has the lower opportunity cost of producing goods enjoys the comparative advantage. In the given question Venezula enjoys comparative advantage in the production of petroluem and China enjoys comparative advantage in the production of clothes. The country Venezula also can produce clothes but at a higher opportunity cost, this is because they do not have higher level of population and industrial development so they need to utiilise more resources to produce cloth. This is also same for China if they produce Petroleum instead of clothes.

Ans: Venezula can produce clthing at lower opportunity cost.

2. Yes, the inverse relationship between the inflation and the unemployment is called the philliphs curve and it is named after the famous economist Edmund Philliphs , he argeud that in the short run there is a trade off between inflation and the unemployment, that is to reduce the unemployment the inflation has to be high and vice versa. The periods of high unemplyment and the inflation is called the stagflation.

An expansioanry fiscal policy increases the aggregate demand and shift the AD curve to the right.  

A leftward shift is a decrease in aggregate demand and this may result from a contractionary fiscal or monetary policy.

Ans: Expansionary policy causes AD to shift to the left.