In the context of environmental cost-benefit analysis, which of the following statements is/are NOT CORRECT?
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- The discount rates do not impact the fixed and variable costs of the project but does impact the perceived benefits in monetary terms.
- The analysis does not incorporate people’s preferences for a policy.
- The analysis is dependent on the choice of the discount rates.
- The discount rates are not easily observable and choice is often subject to value judgements
The Correct Option is B
Solution and Explanation
(A) Correct. Discount rates primarily affect future values (i.e., benefits), not direct project costs.
(B) Incorrect. Environmental cost-benefit analyses do consider people's preferences through willingness-to-pay, surveys, etc.
(C) Correct. The choice of discount rate affects the valuation of future benefits and costs.
(D) Correct. Discount rate selection is subjective and influenced by policy goals and ethical views.
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Consider the two scenarios for a small open economy based on the Mundell-Fleming IS-LM model with floating exchange rate and perfect capital mobility.
Where \( Y \) is aggregate income, \( C \) is aggregate consumption, \( I \) is investment, \( r^* \) is the world interest rate, \( G \) is government expenditure, \( T \) is taxes, \( NX \) is net exports, \( e \) is exchange rate, \( M \) is money supply, and \( P^* \) is general price level. Given the relationships:
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\( P^* \) is fixed.
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