Suppose an Individual Has a Fixed Amount of Wealth to Allocate

question 5

Multiple Choice

Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (c₁ and c₂) .Any funds not spent in period 1 will earn interest (at the rate r) which will increase purchasing power in period 2.Consider four possible reactions to an increase in r:
I.c₁ increases.
II.c₁ decreases.
III.c₂ increases.
IV.c₂ decreases.
Which of these is consistent with the hypothesis that both c₁ and c₂ are normal goods?

• A)I,II,III,and IV
• B)I,II,and IV,but not III
• C)I,III,and IV,but not II
• D)I,II and III,but not IV

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Definitions:

Government Intervention

Actions taken by a government to affect the economy, which can include regulations, subsidies, tariffs, and direct state involvement in certain industries.

Private Sector

The part of the economy that is run by individuals and companies for profit, as opposed to being controlled by the government.

Laffer Curve

A theoretical representation of the relationship between tax rates and tax revenue, suggesting that lower tax rates can lead to higher revenues under certain conditions.

Tax Rates

The percentage at which an individual or corporation is taxed, which can vary depending on the type of tax and jurisdiction.