The Real-Income Effect Refers to

question 1

Multiple Choice

The real-income effect refers to

• A) the law of diminishing marginal utility.
• B) the want-satisfying power of a good or service.
• C) substitution of less expensive commodities for more expensive commodities.
• D) the change in purchasing power when the price of a good changes.

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Definitions:

Inflation

A general increase in prices and fall in the purchasing value of money.

Present Value

The valuation of an expected income stream determined by discounting the future income to the present using a discount rate.

Income Stream

A regular flow of money from an investment, property, or other financial assets.

Real Interest Rate

The interest rate adjusted for inflation, reflecting the real cost of borrowing or the real yield on savings.