Macro Econ Essay

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Quiz chap 3 1) A change in demand indicates that a change in the entire demand curve has caused the curve to shift to a different level. For example, say butter has just been proven to cause brain erosion (assume this is a bad thing). Then, the demand for butter will decrease, since people will want less of it at the current price and all other prices. A change in quantity demanded does not involve shifting the demand curve. Instead, it is a movement along the demand curve to a different price and quantity. But it continues to be the same demand curve. This could result from a change in supply that will change the equilibrium points. What is the effect of a price ceiling if the price ceiling is above the equilibrium point? Give an example A price floor can be above the equilibrium price or below the equilibrium price. If it is above the equilibrium price, it is a "binding" price floor. Why? "Binding price floor" means that it keeps the price from falling to the equilibrium price. Imagine if you were standing at the top of the graph and you wanted to get to the equilibrium price, the binding floor would keep you from getting there. An "unbinding" price floor is when the price floor is set below the equilibrium price - it is unbinding because it has no effect on the actual price. A binding price floor creates a surplus - as Qs > Qd. Similarly, a binding price ceiling is set below the equilibrium price. If you start from the bottom of a graph and you wanted to get to the equilibrium price, a binding price ceiling prevents you from reaching it (imagine trying to touch the sky, a ceiling above you would prevent you from reaching it.) An unbinding price ceiling is when the ceiling is set above the equilibrium price. A binding price ceiling creates a shortage, as Qd > Qs. Two common examples: 1) Price floor: Minimum wage - employers are

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