Question

Open market bond purchases by the Federal Reserve will result in (select the best answer):

a. An increase in the money supply and a decrease of interest rates.

b. A decrease in the money supply and an increase of interest rates.

c. A decrease of the stock market and a rise in the Hillman Paradox Complex to Stage Two

Let’s say you run a company that sells gloves, and your goal is to maximize profits by increasing revenues. In consultation with your marketing vice president you decide that the best way to accomplish this goal is by changing the price of your glove. Your vice president tells you that if you keep the price of gloves at $15 you will be able to sell 400 gloves a month, but if you lower the price to $10 you will be able to sell 1000 gloves a month. Should you lower your price to $10? Use Price Elasticity of Demand to determine whether to lower or maintain the current selling price of your glove.

a. My elasticity is greater than 2 so I should raise my price not lower it

b. My elasticity is .5 so I should certainly lower my price

c. My elasticity is completely irrelevant in determining how to change one's price

d. My elasticity is greater than 2 so I should certainly lower my price

According to the text, the price elasticity of demand for bath tissue has been estimated to be -2.42. This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to:

a. increase by 2.4 percent.

b. decrease by 2.4 percent.

c. increase by 24.2 percent.

d. decrease by 24.2 percent.

Answer 1

Open market operation is an act of controling money supply, either by increasing it or by decreasing it. In an econimy, if ther is inflation, that means increase in money supply, federal reserves will sell government securities son that money supply goes to federal reserves and it will purchase in the opposite case. Thus bond purchases by federal reserve will result in increase in money supply and decrease in interest rates. Since bonds are purchased, money comes to government and moeny supply increases.
ANSWER: b

Old price = $15 & old quantity = 400 units.
New price = $10 & new quantity = 1000 units.
Change in price = $5 & change in quantity = 600 units.
Elasticity = (15/100) * (600/5) = 9/2 = 4.5

High elasticity implies a small change in price will result a large change in quantity. Thus as elasticity is greater than 2 price must me increased and then only quantity demanded will improve.
ANSWER : a

Elasticity = ( % change in quantity / % change in price) = -2.42
Given price has decreased by 10 % i.e. -10%
hence % change in quantity = -2.42 * -10% = 24.2%
Thus quantity demanded will increase by 24.2%
ANSWER : c