If the Substitution Effect Dominates the Income Effect, a Decrease

question 119

True/False

If the substitution effect dominates the income effect, a decrease in transfer payments will have a negative effect on both consumption and labor supply.

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Definitions:

Real Wage

The purchasing power of wages, adjusted for inflation, reflecting the actual goods and services that can be bought.

Inflation Rate

The measure of inflation through the rising cost of goods and services, which diminishes the power of currency.

Nominal Wage

The wage earned by an employee, expressed in current currency terms, without adjustment for inflation or changes in purchasing power.

Efficiency Wage

A wage set above the market equilibrium by employers in an effort to enhance productivity, attract higher quality employees, and reduce turnover.