Question

        Here are two statements about how people’s expectations of future prices affect what they do, and what happens, in the current period.

I If both buyers and sellers expect the price to fall next period, the price would fall in the current period.

II If both buyers and sellers expect the price to rise next period, the price would rise in the current period.

Choose the correct option from the list below.

A Neither statement is true.

B Only I is true.

C Only II is true.

D Both statements are true.

Answer 1

Option D ( Both the statements are true)

Explanation-

1. If both buyers and sellers expect the price to fall next period, the price would fall in the current period. If buyers expect prices to fall in near future they will buy less, which will lead to fall in current demand and also in current prices. If sellers expect prices to fall in next period they will be willing to sell more, which will lead to increase in quantity supplied. There will be excess supply in the current period which will lead to fall in prices of current period.

2.If both buyers and sellers expect the price to rise next period, the price would rise in the current period. If buyer expects price to rise in near future he will buy more which will increase the demand in current period whereas if sellers expect prices to increase in future they will decrease their current supply of goods. It will lead to excess demand in current period which will inturn leads to increase in the current prices.