Question

29. In August 2005, Hurricane Katrina damaged or destroyed oil platforms in the Gulf of Mexico, refineries along the Gulf coast, and the pipeline infrastructure that transports oil and gas to customers across the eastern United States. The winter of 2006 was unusually cold in many parts of the country. How did these events affect the market for natural gas? (Explain which curve(s) shift(s) and the effects on the equilibrium quantity and equilibrium price of natural gas.) 30. Suppose that the annual nominal rate of interest is 7% and the actual annual inflation rate is 3%. The annual actual real rate of interest is a. 4%. b. 10%. c. 3%. d. 7%. 31. In 2000, a Transylvanian doctor, Dr. Frank N. Stein, earned a nominal income of $60,000 and the Transylvanian CPI was 100. In 2004, Dr. Stein earned Ja nominal income of $80,000 and the CPI was 140. Which of the following is true? a. Dr. Stein's real income (purchasing power) was greater in 2000 than in 2004. b.Dr. Stein's real income (purchasing power) was the same in 2004 as it was in 2000. c. The Transylvanian cost-of-living increased by 20% between 2000 and 2004. d. Dr. Stein's real income (purchasing power)

Answer 1

29) The hurricane damaged the oil platforms that were a major source of oil for US at the time and this caused a severe shortfall in production and hence supply of natural gas to the US. A decrease in supply while the demand doesn't change causes an increase in price by a significant amount. In graphical terms, the supply curve would shift upwards while the demand stays more or less the same and this therefore, causes an increase in the equilibrium price of natural gas and decrease in equilibrium quantity. (The new equilibrium becomes Q2 and P2).

S7 Q2 Q1

30) a. 4%. Nominal interest rate - inflation rate = real interest rate. This is because nominal interest rate is the one considered before taking inflation into account while real interest rate accounts for inflation.

31) a. Dr. Stein's real income (purchasing power) was greater in 2000 than in 2004.

Real income= Nominal income/price level.

Dr. Stein's real income in 2000 = $60,000/100 = $600

Dr. Stein's real income in 2004 = $80,000/140 = $571 (approximately).

Therefore, his purchasing power was greater in the year 2000.