Reference no: EM133079240

Changes in the rate of interest are detectable in the changes in the structure of relative prices of various types of goods. With that in mind, answer the following two questions and explain your answers.

a. If the price of raisins (relative to grapes), of prunes (relative to plums), of whiskey (relative to corn), of cider (relative to apples) should rise, would that mean a change in the rate of interest? In what direction would the change in interest go, up or down? Why?

b. If you were advising the farmers in the cases listed above, would you tell them to invest in making raisins, prunes, whiskey, and cider? Why?

As noted in Chapter 14 of A&A, distribution of income among various population groups followed roughly the same patterns in the USA, Sweden, and the former Soviet Union, despite the very different forms of economic organization in each of those countries. Progressives and socialists today claim that if we had a planned economy in which the government directed the direction of resources instead of it being done through a profit-and-loss system and confiscated money from wealthy people via high taxes, and then re-distributed those revenues, that income inequality would be eliminated. Yet, that clearly was not the case in high-tax Sweden and the communist USSR, both of which featured all-encompassing welfare states. (In the USSR, the high-income groups tended to be those with membership in the Communist Party, about six percent of the population. It was difficult if not impossible for ordinary citizens to obtain Communist Party membership.)

Economically speaking, why would this situation be the case, despite what modern academics, politicians, journalists, and activists are saying today? Please be specific in your answer.