Differentiate between an income effect and a substitution effect
What will be an ideal response?
Ceteris paribus, the income effect of a price decrease increases the opportunity to buy more of all goods, whereas the substitution effect of a price decrease makes the good become relatively cheaper. In the case of a price increase, the income effect reduces the opportunity to buy all goods, whereas the substitution effect makes the good become relatively more expensive.
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Suppose the price of gold is initially 300 U.S. dollars per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ________ Canadian dollars per U.S. dollar.
A. 0.67; 0.59 B. 1.70; 1.50 C. 0.59; 0.67 D. 1.50; 1.70
When the marginal cost of producing a bike is greater than the marginal benefit of the bike, for resource use to be allocatively efficient,
A) more bikes should be produced. B) fewer bikes should be produced. C) no more and no fewer bikes should be produced. D) it must be determined if the production of bikes can be increased. E) people must be educated to demand more bikes.
Milton Friedman first proposed the hypothesis that individuals consume a fraction of their expected, or ________, income
A) disposable B) net C) attainable D) permanent E) life-cycle
When an economy is on the balanced growth path, the growth rate of real GDP per capita is determined by the growth rate of
A) convergence. B) capital accumulation. C) total factor productivity. D) the labor force.