Explain how changes in wealth, the price level, interest rates, and expectations alter the consumption curve.
What will be an ideal response?
An increase in wealth increases consumption at each level of disposable income (shifts the consumption curve upward). A rise in the price level reduces the real value of assets. This reduction in wealth reduces consumption at each level of income (shifts the consumption curve downward). An increase in interest rates the reward for saving and discourages borrowers from securing current spending power. An increase in interest rates, therefore, will shift the consumption curve downward. A rise in price expectations may encourage more households to buy now to beat the expected price increase regardless of their current disposable income (shifts the consumption curve upward).
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Assume that there were decreasing opportunity costs of production in an island economy that only produced two goods. What would the shape of the production possibilities frontier look like and why?
What will be an ideal response?
Suppose there are two cities that have rent controlled apartments. In one city (Albany) all apartments are subject to rent control; in the other city (Halftrack) one-half of the apartments are rent controlled
Which of the following is most likely to be true? A) It will be easier to find an affordable apartment in Halftrack, either a rent-controlled apartment or another apartment, at a reasonable price. B) It will be difficult to find a rent-controlled apartment in Albany or Halftrack; rents for the Halftrack apartments not subject to controls will be higher than they would be without rent control. C) It will be easier to find an affordable apartment in Albany since rents will be low across the board. D) It will be impossible to rent an apartment in either city at any price.