Question

Scenario 9-1 The before-trade domestic price of peaches in the United States is $40 per bushel. The world price of peaches is $52 per bushel. The U.S. is a price-taker in the market for peaches. Refer to Scenario 9-1. If trade in peaches is allowed, the price of peaches in the United States a. will increase, and this will cause consumer surplus to decrease. b. will decrease, and this will cause consumer surplus to increase. c. will be unaffected, and consumer surplus will be unaffected as well. d. could increase or decrease or be unaffected; this cannot be determined.

(Q15)   Nominal GDP will definitely increase when a. prices increase and output increases. b. prices increase and output decreases. c. prices decrease and output increases. d. All of the above are correct.

Answer 1

A) Will increase, and this will cause consumer surplus to fall.

Since the US is a price taker in the market for peaches, it will have to accept the world price of $52/bushel in order to trade. Consumer surplus is defined to be the area above the price level and below the demand curve. If the price level rises, this area becomes lower and hence consumer surplus falls.

Q15) A) When price increases and output increases.

Nominal GDP is calculated as= (Price * Quantity)

If price rises then nominal GDP will rise and likewise if output/ quantity produced in the economy rises, the nominal GDP will rise.