Inflation_{--------------------}the Cost of Holding Money And_{--------------------}the After-Tax Real Interest Rate

question 2

Multiple Choice

Inflation_{--------------------}the cost of holding money and_{--------------------}the after-tax real interest rate.

• A)increases; increases
• B)increases; does not change
• C)decreases; increases
• D)decreases; decreases
• E)increases; decreases

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Definitions:

Time Allocation

The decision about how many hours to spend on different activities, which leads to a decision about how much labor to supply.

Income Effect

The change in an individual’s or economy’s income and how that change affects the quantity demanded of a good or service.

Hourly Wage

The amount of money paid for each hour of work, often set by an employer or by legal minimum wage laws.

Substitution Effect

The economic principle that as prices rise or income decreases, consumers will replace more expensive items with less costly alternatives.