Question

Question 1

A price ceiling on beef. The inverse demand and supply curves for beef are given by: P = 12 – 0.2Qd and P = 0.2Qs, where P is the price of beef in dollars per pound (USD/lb) and Q is the quantity of beef in million pounds (mil lb). The price ceiling is equal to $5/lb.

1. Explain the purpose of this policy: what is it intended to do? (5 points)
2. Calculate the equilibrium price and quantity of beef in free markets. (5 points)
3. Calculate Qs and Qd under the price ceiling. (5 points)
4. Who is helped and who is hurt by this policy? (5 points)
5. Calculate the changes in producer and consumer surplus for the price ceiling policy. (5 points)

Question 2

How is a monetary policy used during a recession? During a boom? What is the current monetary policy being used by Federal Reserve? Explain why they are on this policy course. (10 points)

Question 3

If you are a borrower, are you better off with inflation or deflation? Why? (10 points)

Question 4

Welfare economics provides a framework for evaluating the impact of a normative statement or government policies. Explain the framework of welfare economics. What are consumer and producer surplus? Explain why there are differences in willingness to pay along the demand market curve. Explain why there are difference in costs along the market supply curve. (25 points)

Question 5

Explain the difference between real and nominal dollars. Explain why it is important to use real dollars when evaluating trends in prices. (10 points)

Question 6

Figure 11.6 Macroeconomic policy linkages to agriculture, shows direct links between macroeconomic policies and agriculture. Explain the impact contractionary monetary policies have on interest rates and inflation. Further, explain how these changes in interest rates and inflation impact agricultural commodity and agricultural input prices. (20 points)

Answer 1

Answer 1 a : The purpose of price ceiling such as :

• To keep the price below the market equilibrium price.
• To protect the customers from producers to charge higher price.
• To keep an economy in welfare.

b : Equiliburm price and quantity in free market area :

Demand : P = 12-0.2 Q

Supply : P = 0.2 Q

12-0.2 Q = 0.2 Q

12= 0.4 Q

Q= 30 UNITS

P = $6/lb

C : When there is a price ceiling than :

Demand : P = 12-0.2 Q _D =

5= 12-0.2 Q _D

Quantity demanded = 35 units

Supply

P = 0.2 Q _S

5 = 0.2 Q _S

5/0.2 = 25 = Q _S

Quantity supplied is 25 units

D : Both Consumer and producer are  hurted  by this policy as producer  are able to reduce there production and get lower price for the product where as Consumer are able to not satisfied there demand and shortage of goods has been arised .

E : Change in consumer surplus = Decrease by $ 2.5

Consumer Surplus before price ceiling = 0.5 *( 12-6)*30= $90

Consumer Surplus After price ceiling = 0.5 * (12-5)*25= $87.5

Change in producer Surplus = Decrease by 27

Producer Surplus before price ceiling = 0.5*(6-0.2)*30= $87

Producer Surplus after price ceiling = 0.5 * ( 5-0.2)*25 = $60

Answer 2 : In the period of recession , the fed will lower the interest rates and increases the money supply as now money circulation in the market has been increased.

In the period of expansion the fed government will increase the interest rate and decreases the money supply in the market place and now the money has been properly circulated in the market area.

Expansionary monetary policy is generally used in the period of recession where there is easy flow of money in the market area where as tight money policy used in boom time period.

The Current monetary policy of USA are :

• Stable prices of the product.
• promotion of long term employment
• Moderate level of long term interest rates.

Monetary policy directly affects the household spending in an economy, business investment, production , employment and inflation in an economy.   

E :