IAI Actuarial Core Principles · Business Economics · Relationship between economics and business
In a pure market economy, which mechanism mainly decides what goods are produced and how resources are allocated among competing uses?
The price system decides allocation in a pure market economy. Prices signal scarcity and profitability, so firms and consumers adjust their decisions, directing resources to their most valued uses without central direction.
- AThe price system responding to the decisions of buyers and sellersCorrect
- BA central planning authority setting output targets
- CGovernment rationing of all scarce goods
- DCustomary rules passed down through tradition
- Decisions of the central bank on money supply
Explanation
In a market economy, relative prices signal scarcity and profitability, guiding firms and consumers. Central planning and rationing characterise command economies, and tradition characterises traditional economies. The central bank's money supply decisions do not allocate resources in this way.
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