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Unformatted text preview: Macroeconomic Principles Economics 1101 Spring 2010 Homework Set 2: Solution Posted: February 22, 2010. 1 Definitions The definition questions are straight from the text. If you have doubts about any you can get in touch with me. 1. Demand: 2. Quantity Demanded: 3. Law of Demand: 4. Change in Demand: 5. Change in Quantity Demanded: 6. Supply: 7. Quantity Supplied: 8. Law of Supply: 9. Change in Supply: 10. Change in Quantity Supplied: 11. Market Equilibrium: 12. Gross Domestic Product: 13. Consumption: 14. Investment: 15. Import: 16. Export: 17. Final Good: 18. Intermediate Good: 19. Savings: 20. National Saving: 1 2 Short Answer Questions 1. In the summer of 2008 the price of food shot up in a manner not seen in the last two decades. One reason ascribed to this rise was the increased use of corn to make ethanol. Using a simple demand-supply framework explain how this happened. You may want to use the idea of com- plements and substitutes in production, and how changes in demand for one have an impact on the price of other. The simple answer is that the supply of food fell down, while the demand has been rising consistently. What I expected here was two things: one, that demand for food has been rising with rising population and rising income across the world; and two, that supply of food fell in the summer of 2008 due to rising ethanol prices and some crop failures. Ethanol and food are complements in production. If ethanol prices go up the farmers will be more inclined to produce corn, that fetches them a higher income. It will also mean that corn that would otherwise have gone into the food chain goes into making ethanol. Thus, there are two factors influencing the supply of food. One, farmers are producing lower amount of grains other than corn, and two, the corn produced is being directed towards ethanol production. Thus, supply falls. We can also show this using a simple graph where we show an increase in demand, and a fall in supply. The net impact is that the price will go up, but the impact on quantity is uncertain. If you have shown this in your submission nothing like it, but if you have just mentioned falling supply that will be fine too!...
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