The increase in consumption of a good when its price falls is caused by two effects. What are these two effects? Explain the difference between these effects
What will be an ideal response?
The two effects are the substitution and income effects. According to the substitution effect, more is consumed when the price of a good falls because the price of the good in question is now lower relative to the prices of other goods. In addition, the fall in price increases the consumer's purchasing power causing the quantity demanded to increase for a normal good and decrease for an inferior good. This is the income effect. For most goods, the income effect is small relative to the substitution effect which is why the overall effect of a price decrease is an increase in quantity demanded.
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Which of the following is the source of funds for bank loans?
A) marketable securities B) required reserves C) excess reserves D) bank capital
The reason why the price level does not change along the horizontal segment of the aggregate supply curve is because
a. the price increases for some goods are offset by the price decreases for other goods b. unused resources can be put to work without creating any upward pressure on prices c. the government fixed the price of resources so that they cannot increase in price when employment levels rise d. GDP rises rapidly so that the price level does not rise e. GDP rises slowly so that the price level does not rise