2.2. Market Equilibrium for Breakfast Cereal - 1 Scenario1: Consider wheat, an input into many final food products such as breakfast cereal. Nordhaus discusses the role that climate change is expected to have in reducing mountain snowpack in many regions of the world. Reduced snowpack reduces water availabilityfor irrigation, thereby harming agricultural productivity (p. 84 in Nordhaus' Climate Casino book). Because cereal and milk are often eaten together, assume they are complements for the purposes of this assignment. Now, consider the market for breakfast cereal (e.g. Wheaties) where wheat is an input. Using supply and demand diagrams, what effect will a widespread climate change-induced reduction in mountain snowpack will have on equilibrium in the markets for breakfast cereals?

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.