Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium
What will be an ideal response?
The increase in demand causes a shortage at the original equilibrium price; the quantity supplied is less than the new quantity demanded at that price. The existence of the shortage will cause the price to rise. As price rises, the quantity supplied will increase and the quantity demanded will decrease (along the new demand curve) until equilibrium is reached at a higher price (and quantity).
You might also like to view...
Explain the relationship between real GDP and potential GDP and between the unemployment rate and the natural unemployment rate as the economy moves through a business cycle
What will be an ideal response?
The Federal Reserve cut the federal funds rate seven times between September 2007 and March 2008. What event led the Fed to make these reductions in the federal funds rate?
A) The chairman of the Federal Reserve System persuaded members of the Federal Open Market Committee to lower interest rates in order to reduce the price of oil in international markets. B) During this period there was a substantial reduction in the demand for housing. C) It was in response to reductions in the discount rate, which was also lowered seven times over the same time period. D) Several large investment banks failed during this time period.