The Assumption That Current-Period Labour Supply Is Positively Related to the Current-Period

question 5

Multiple Choice

The assumption that current-period labour supply is positively related to the current-period real wage is justified as long as the

• A)substitution effect dominates the income effect in the short run.
• B)substitution effect equals the income effect in the long run.
• C)income effect dominates the substitution effect in the long run.
• D)income effect dominates the substitution effect in the short run.
• E)substitution effect dominates the income effect in the long run.

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Definitions:

Systematic Risk

The risk inherent to the entire market or market segment, also known as non-diversifiable risk or market risk.

Market Risk Premium

The higher return an investor foresees from investing in a market portfolio with associated risks as opposed to choosing completely safe assets.

Risky Asset

An asset that carries a higher degree of risk of loss, but also offers a higher potential return.

Risk-free Asset

An investment with zero risk of financial loss, theoretically providing guaranteed returns, such as government bonds.