Question : The wealth effect suggests that an increase in the price level leads to:
Option 1: A decrease in consumption expenditure
Option 2: An increase in consumption expenditure
Option 3: A decrease in investment expenditure
Option 4: An increase in investment expenditure
Correct Answer: A decrease in consumption expenditure
Solution : The correct answer is (a) A decrease in consumption expenditure.
The wealth effect suggests that an increase in the price level leads to a decrease in consumption expenditure. This effect occurs because as the price level rises, the purchasing power of individuals' wealth diminishes. In other words, their money can buy fewer goods and services.
When people perceive that their wealth has decreased in terms of real purchasing power, they tend to reduce their consumption expenditure. This is because they feel relatively poorer and have less disposable income available for spending. As a result, the overall level of consumption expenditure in the economy decreases.
Question : The concept of the multiplier effect suggests that an increase in:
Option 1: Investment expenditure leads to a larger increase in real GDP
Option 2: Consumption expenditure leads to a larger increase in real GDP
Option 3: Government expenditure leads to a larger increase in real GDP
Option 4: Net exports leads to a larger increase in real GDP
Question : The crowding-out effect suggests that an increase in government expenditure leads to:
Option 1: A decrease in private investment
Option 2: An increase in private investment
Option 3: No change in private investment
Option 4: An increase in savings
Question : The crowding-out effect refers to:
Option 1: A decrease in private investment due to an increase in government expenditure
Option 2: An increase in private investment due to an increase in government expenditure
Option 3: A decrease in government expenditure due to an increase in private investment
Option 4: An increase in government expenditure due to a decrease in private investment
Question : The interest rate effect states that an increase in the price level leads to:
Option 1: An increase in the interest rate
Option 2: A decrease in the interest rate
Option 3: No change in the interest rate
Question : Inflation is defined as:
Option 1: A sustained increase in the general price level
Option 2: A sustained decrease in the general price level
Option 3: A temporary increase in the general price level
Option 4: A temporary decrease in the general price level
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