PA - Microeconomic and Macroeconomic Principles

Question 1

Factors Increasing Demand

Answer 1

An increase in the price of a substitute and a decrease in the price of a complement increase demand. Example: Higher soda prices increase juice demand; lower price for hot dog buns increases hot dog demand.

Question 2

Market Surplus

Answer 2

Occurs when quantity supplied exceeds quantity demanded. Example: Too many unsold TVs lead to clearance sales.

Question 3

When demand decreases and supply stays the same, what happens to the equilibrium point of price and quantity?

Answer 3

Results in a decrease in both equilibrium price and quantity. Scenario:
In summer, bottled iced tea is in high demand. But once winter arrives, demand drops significantly. However, producers still have the same amount of iced tea stocked and ready to sell (supply stays the same).

🔽 What Happens to the Equilibrium?
Price decreases – With less demand, sellers must lower prices to attract buyers.

Quantity decreases – Fewer people want the product, so fewer units are sold.

Question 4

Inelastic Demand

Answer 4

Quantity demanded changes only slightly with price changes. Example: People still buy salt even if its price increases.

Question 5

Negative Cross-Price Elasticity

Answer 5

Goods that are complements have negative cross-price elasticity. Example: A price increase in peanut butter reduces demand for jelly.

Question 6

Fed Increases Money Supply

Answer 6

The Fed buys bonds from the public to inject money into the economy. Example: The Fed purchases Treasury bonds, giving banks more funds to lend.

Question 7

Effect of Increased Money Supply to the ADC

Answer 7

Shifts the aggregate demand curve to the right. Example: More available money increases consumer and business spending.

Question 8

How Fed Lowers Federal Funds Rate

Answer 8

By purchasing government bonds, increasing money in the banking system. Example: More reserves lead banks to lend more, reducing interest rates.