Suppose Solomon Lives in a Community with No Price Controls

question 20

Multiple Choice

Suppose Solomon lives in a community with no price controls.What do you expect will happen if his town borders a community where there is a binding price ceiling on most products?

• A) Prices in the legal market in the community with a binding price ceiling will rise.
• B) Prices in the legal market in the community with a binding price ceiling will fall.
• C) There will be shortages in the community with a binding price ceiling.
• D) More consumers will purchase products in the community with the price ceiling.
• E) The black market in his community will be larger than the black market in the community with the binding price ceiling.

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Definitions:

Effective Interest Rate

The actual interest rate that a borrower pays or earns on a loan or investment, taking into account the effect of compounding.

Compounded Options

A financial derivative instrument that contains an option that itself has a feature making its payoff at least partially dependent on the future level of interest rates.

GICs

A kind of investment in Canada known as Guaranteed Investment Certificates that provide a promised return rate for a specified duration.

Nominal Annual Rates

The stated annual interest rate of a loan or investment, not accounting for compounding within the year.