Suppose a Consumer Is Spending All of His/her Income on Two

question 247

Multiple Choice

Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MU_a = 15 and MU_b = 75, and the P_a = $3 and the P_b = $15, then the consumer:

• A) is maximizing his/her utility.
• B) should increase his/her purchases of B and decrease the purchases of A.
• C) should spend more money on both goods.
• D) should spend less money on both goods.
• E) should increase the purchases of A and decrease the purchases of B.

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Definitions:

Money Demand

The desired holding of financial assets in the form of money; it is often associated with the level of liquidity preference.

Real Interest Rate

The interest rate adjusted for inflation, representing the true cost of borrowing or real yield on investment.

Value of Money

The purchasing power of currency, indicating the amount of goods or services that one unit of money can buy, which fluctuates over time due to inflation or deflation.

Quantity Theory

A theory in economics that addresses the relationship between the amount of money in an economy and the level of economic activity, asserting that the general price level of goods and services is directly proportional to the amount of money in circulation.