Author Question: The term currency drain refers to an increase in currency held outside banks. Indicate whether ... (Read 178 times)

dmcintosh · **on:** Jun 29, 2018

The term currency drain refers to an increase in currency held outside banks.

Indicate whether the statement is true or false

Question 2

Your friend Tony opened a pizzeria. You helped him to advertise his pizza, which is in fact the best pizza in town. As a result, the demand for Tony's pizza increases and your friend, noticing lines of customers, raises the price of his pizza.

But then he fears that the higher price will cause demand to decline, which will cause the price to drop. Is Tony right in his analysis of the situation? Explain.

miss_1456@hotmail.com · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

TRUE

Answer to Question 2

Tony is confusing a change in demand (a shift of the demand curve) with a change in quantity demanded (a movement along the demand curve). An increase in the price of his pizza cannot cause the demand for his pizza to decline, that is, it cannot shift the demand curve for his pizza leftward. The rise in the price results in a decrease in the quantity of pizza demanded. So Tony need not fear that the demand for his pizza will decrease as a result of a higher price.