For a normal good, the income and substitution effect work in the same direction. For an inferior good, the income and substitution effects work in opposite directions
Does this imply that the demand curve for an inferior good is upward sloping? Explain.
No. As long as the income effect is smaller than the substitution effect the demand curve will still be downward sloping.
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Starting from long-run equilibrium, the long-run impact of a war that raises government purchases, compared to the original equilibrium, is:
A. higher inflation and higher output. B. lower inflation and the same output. C. lower inflation and lower output. D. higher inflation and the same output.
Which of the following would be considered a fiscal policy action?
A) Spending on the war in Afghanistan is increased to promote homeland security. B) Tax incentives are offered to encourage the purchase of fuel efficient cars. C) A tax cut is designed to stimulate spending during a recession. D) The Fed increases the money supply.
A monopolist hiring labor in a perfectly competitive resource market is faced with a:
a. perfectly elastic demand curve for labor. b. horizontal marginal factor cost curve. c. perfectly inelastic demand curve for labor. d. vertical supply curve of labor. e. positively sloped marginal factor cost curve.
When institutions and policies provide secure property rights, a fair and balanced judicial system, monetary stability, and effective limits on the power of government, which of the following is most likely to be encouraged?
a. rent-seeking b. actions that reduce the value of resources c. productive activities d. destructive activities