Problem 1 (20%)
A. What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each.
B. What are the determinants of supply? What happens to the supply curve when any of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each
1. Suppose the supply of apples sharply increases because of perfect weather conditions throughout the growing season. Assuming no change in demand, explain the effect on the equilibrium price and quantity of apples. Explain why quantity demanded increases even though demand does not change
2. Assume the demand for lumber suddenly rises because of a rapid growth of demand for new housing. Assume no change in supply. Why does the equilibrium price of lumber rise? What would happen if the price did not rise under the demand and supply circumstances described?
Problem 3 (20%)
1. Why are changes in inventories included as part of investment spending? Suppose inventories declined by $1 billion during 2014. How would this affect the size of gross private domestic investment and gross domestic product in 2014? Explain. (10%)
2. Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? (10%)
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