When the Price of a Good Falls Relative to Other

question 87

Multiple Choice

When the price of a good falls relative to other goods and the consumer consequently buys more of this good, what is this referred to as?

• A) the income effect
• B) the substitution effect
• C) the net effect
• D) the complement effect

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Definitions:

Real Interest Rate

The interest rate adjusted for the inflation rate, reflecting the real cost of borrowing and the real yield to lenders or investors.

Nominal Interest Rate

The rate of interest before adjusting for inflation, representing the face value of interest payments.

Inflation Rate

The tempo at which the broad cost of goods and services rises, leading to a downfall in purchasing strength.

Deflation

Deflation is a decrease in the general price level of goods and services, often associated with an increase in the purchasing power of money.