Demand Analysis. The demand for automobiles is often described as highly cyclica
ID: 1248807 • Letter: D
Question
Demand Analysis. The demand for automobiles is often described as highly cyclical, and very sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for automobiles. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the relevant demand curve for autos. Explain your answers.A. A decrease in auto prices
B. A fall in interest rates
C. A rise in interest rates
D. A severe economic recession
E. A robust economic expansion
Explanation / Answer
Demand Analysis. The demand for automobiles is often described as highly cyclical, and very sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for automobiles. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the relevant demand curve for autos. Explain your answers. Q=f(P); Ordinary demand curve is expressed as Q as a function of price. on x axis quantity is taken on y-axis price is taken. Curve slopes down as the price decreases P=f(Q); An inverse demand curve is expressed as P as function of Q.on x axis price is taken on y-axis quantity is taken. Curve slopes upwards as the price increases. A. A decrease in auto prices When Q is a function of Price, Q=f(P); increases the demand for autos, moves down the demand curve. When price is a function of Q, P=f(Q); increases the quantity demanded, but the movement will be upwards along the curve. B. A fall in interest rates: Q=f(P); increases money supply in the market, which shifts both demand and supply curve towards its right. Price may remain constatnt, but quantity demanded will increase. P=f(Q); demand curve will shift towards its right, increasing demand at every price level. Supply curve will shift towards its left increasing supply at every price level. Eq Price remains cosntant but Eq Quantity demanded will increase C. A rise in interest rates Q=f(P); Decreases money supply in the market, which shifts both demand and supply curve towards its left. Price may remain more or less constatnt, but quantity demanded will decrease. P=f(Q);Decreases money supply in the market, demand curve will shift towards its left, decreasing demand at every price level. Supply curve will shift towards its right decreasing supply at every price level. Eq Price remains constant but Eq Quantity demanded will increase. D. A severe economic recession: Q=f(P); Decreases aggregate demand, which shifts both demand and supply curve towards its left. Price may remain more or less constatnt, but quantity demanded will decrease. P=f(Q);Decreases aggregate demand, demand curve will shift towards its left, decreasing demand at every price level. Supply curve will shift towards its right decreasing supply at every price level. Eq Price remains constant or may decrease but Eq Quantity demanded will increase. E. A robust economic expansion: Q=f(P); Increases aggregate demand, which shifts both demand and supply curve towards its right. Price may remain constatnt, but quantity demanded will increase. P=f(Q);Increases aggregate demand, demand curve will shift towards its right, increasing demand at every price level. Supply curve will shift towards its left increasing supply at every price level. Eq Price remains cosntant but Eq Quantity demanded will increase
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