EBK ECONOMICS
4th Edition
ISBN: 8220101443649
Author: KRUGMAN
Publisher: YUZU
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Question
Chapter 25, Problem 11P
To determine
How the change in the expected future inflation rate affect the
Concept introduction:
Loanable Funds Market: It is an imaginary market which illustrates the market result of the demand for funds which are generated by borrowers and supply of funds which are provided by the lenders.
Demand for Loanable Funds: It is represented by a downward sloping curve which indicates that as the interest rate increases the demand for loanable funds decreases and vice versa.
Supply for Loanable Fund: It is represented by the curve that slopes upward which means that as the interest rate increases the supply of loanable fund also increases and vice versa.
Equilibrium Interest Rate: In the loanable fund market the point where demand curve and supply curve intersect each other gives the equilibrium interest rate.
Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by Fisher effect.
Inflation: When the price of any good increases continuously for an interval of time it is called inflation.
Fisher Effect: According to this effect when there is a rise in expected inflation rate then there is always a rise in nominal interest rate provided loanable fund quantity and interest rate do not change.
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Please answer the following.
The figure below shows the hypothetical domestic supply and demand for baseball caps in the country of Spain.
Domestic Supply and Demand for Baseball Caps
Price (€ per cap)
10
9
8
7
6
5
4
3
2
1
0
Spain
Dd
10 20 30 40 50 60 70 80 90 100
Baseball caps (thousands per month)
Suppose that the world price of baseball caps is €2 and there are no import restrictions on this product. Assume that Spanish
consumers are indifferent between domestic and imported baseball caps.
Instructions: Enter your answers as whole numbers.
a. What quantity of baseball caps will domestic suppliers supply to domestic consumers?
thousand
b. What quantity of baseball caps will be imported?
thousand
Now suppose a tariff of €1 is levied against each imported baseball cap.
c. After the tariff is implemented, what quantity of baseball caps will domestic suppliers supply to domestic consumers?
thousand
d. After the tariff is implemented, what quantity of baseball caps will be imported?
thousand
May I please have the solutions for the following assignment? as 2025
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