Imagine that the news reports that, due to global factors, the price of petrol (fuel) is likely to increase substantially next week. What impact is this likely to have on demand for petrol now?

Question

BlackTom AI · Accepted Answer

Question restatement: The scenario describes news that petrol prices are expected to rise substantially next week, and asks what impact this anticipation will have on current demand for petrol.
Option a: Expansion. In macroeconomics, expansion refers to an increase in overall output or demand in general, not specifically to a shift in the quantity demanded due to a price expectation for a particular good. This label is not appropriate for describing the immediate response of petrol demand to anticipated price changes.
Option b: Decrease. If people expect prices to rise soon, the typical reaction to avoid higher costs is to purchase more now, not to cut current demand. A decrease would imply people wait or buy less today, which does not align with the anticipation effect under normal consumer behavior.
Option c: Increase. This is the correct interpretation: when a future price rise is anticipated, consumers increase current purchases to stock up or to avoid higher costs later. The result is a higher quantity demanded today driven by price expectations, a classic example of the demand-influencing effect of expectations.
Option d: Contraction. A contraction is a broad reduction in real economic activity or demand, not specifically the immediate response to a forecast of higher prices for a single good. It mischaracterizes the short-run, anticipatory effect on petrol demand.
Summary: The key idea is that anticipated higher future prices encourage current purchase, boosting current demand for petrol rather than reducing it. Therefore, option c reflects the correct behavior, while options a, b, and d misinterpret the effect of price expectations on current demand.

Imagine that the news reports that, due to global factors, the price of petrol (fuel) is likely to increase substantially next week. What impact is this likely to have on demand for petrol now?

View Explanation

Log in for full answers

Similar Questions