A market economy is characterized by strict government regulation of prices and production.

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Consider the statement presented: 'A market economy is characterized by strict government regulation of prices and production.'
Option 1: True. This would assert that market economies rely on heavy government control over prices and production. In established economic theory, a market-based system emphasizes voluntary exchanges, price signals from supply and demand, and relatively limited intervention. Strict regulation of prices and production is more typical of a planned or command economy, not a market economy, so labeling the statement as true would mischaracterize how markets operate.
Option 2: False. This aligns with the mainstream understanding that market economies rely on decentralized decision making, where prices emerge from the interaction of buyers and sellers, and government intervention is typically limited to creating and enforcing laws, property rights, and certain regulatory safeguards rather than setting prices and production levels directly. The presence of heavy regulation would indicate more of a centrally planned or mixed system, not a pure market economy.
In evaluating the options, the core misconception in the first choice is assuming that markets function under rigid government control, which undermines the defining mechanism of market economies: price signals and voluntary exchange driven by private decisions. The second choice correctly identifies the opposite situation, describing the general characteristic of market-oriented systems. The distinction hinges on who primarily allocates resources and sets prices: market participants through supply, demand, and competition, rather than the government lagging in as the primary allocator.

Fall 2025 Principles of Macroeconomics (ECONO-2201-NET10) Assignment on chapters 1 and 2 Fall 2025 Principles of Macroeconomics (ECONO-2201-NET10) Assignment on chapters 1 and 2

A market economy is characterized by strict government regulation of prices and production.

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