Economics 2302

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Prof. Mohammad Moghadassian
Econ 2301
February 29, 2012

Writing Assignment
Section 1:

1. Equilibrium Price
Qs = Qd
QUANTITY SUPPLIED
P = 2 + 0.2Qs
P - 2 = 0.2Qs
(P - 2)/0.2 = Qs
QUANTITY DEMAND
P = 10 - 0.2Qd
0.2Qd = 10 - P
Qd = (10 - P)/0.2

(P - 2)/0.2 = (10 - P)/0.2
P - 2 = 10 - P
P + P = 10 + 2
2P = 12
P = 6

2. Equilibrium quantity

6 = 2 + 0.2Qs
6 - 2 = 0.2Qs
4 = 0.2Qs
4/0.2 = Qs
Qs = 20
6 = 10 - 0.2Qd
0.2Qd = 10 - 6
0.2Qd = 4
Qd = 4/0.2
Qd = 20
3.

4.
A)

B) An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity. C) This product is a NORMAL good

Section 2:
The business cycle describes the growths and declines that an economy will experience over a length of time. Businesses go through a pattern of ups and downs in their activity level similar to a roller coaster. The value of the activity level is measured from peak to peak by gross domestic product (or GDP) and will fluctuate over a period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. Although long term patterns are predictable their frequency, magnitude, and duration are irregular. Part A)

The business cycle is characterized by four main phases. During economic growth or expansion there is a “Boom” period of rapid economic growth, prosperity. During this time, the level of aggregate demand for goods and services is very high. Typically, businesses use the opportunity of a boom to raise output and also widen their profit margins. The energy is high and unemployment is low as economy creates new jobs. An economic boom occurs when real GDP grows faster than the trend rate of economic growth. An example of this is the housing market boom earlier this century. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition. The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008. Buyers bought houses they couldn't afford, believing they could refinance in the future and benefit from the ongoing appreciation. Lenders assumed that even if everything else went wrong, properties could still be sold for more than they cost and the loan could be repaid. Well they were wrong sending the economy into a recession. A recession is a phase in the business cycle in which the economy as a whole is in a decline. More specifically after a business cycle peaks but before it goes into a slump. During this contraction time businesses start to cut back on investments due to the falling levels of consumer spending and lower profits. The market defines economic recession as a decline in the GDP for two or more consecutive quarters. When the economy is in a prolonged phase of declining GDP it is known as a depression. During this phase there is an increase in unemployment rates and decrease in the flow of money into the economy. Businesses find it very difficult to earn profits. As a result they reduce their staff that leads to unemployment. An overall crisis in industry and commerce is felt and defaults in loan repayment and bankruptcies commonly occur during an economic depression. Both economic recession and depression refer to a slump in economic activity have often been used interchangeably. However, it should be understood that both are different mainly in terms of their severity. The last real depression that the US economy has faced was the Great Depression of the 1930s. The last phase is recovery. Things start to get better, consumers start spending again and business gain confidence and start investing again. Our...
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