The income effect of an increase in the wage rate on the quantity of leisure demanded
A. makes leisure less expensive which causes people to work less.
B. gives people more purchasing power and causes people to work less.
C. gives people less purchasing power and so they will work more.
D. makes leisure more expensive which leads people to work more.
Answer: B
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When stock prices fall
A) an individual's wealth is not affected nor is their willingness to spend. B) a business firm will be more likely to sell stock to finance investment spending. C) an individual's wealth may decrease but their willingness to spend is not affected. D) an individual's wealth may decrease and their willingness to spend may decrease.
Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation would
A) have no effect on nominal exchange rates. B) be completely offset by changes in the real exchange rate. C) be completely offset by changes in the nominal exchange rate. D) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.