As the Relative Price of a Good Falls, the Substitution

question 224

Multiple Choice

As the relative price of a good falls, the substitution effect implies that people buy

• A) less of that good and more of its substitutes.
• B) more of that good and less of its substitutes.
• C) less of that good and less of its substitutes.
• D) more of that good and more of its substitutes.

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Definitions:

Money Supply

The total amount of monetary assets available in an economy at a specific time, including cash, currency, and certain types of bank deposits.

Price Level

A measure of the average prices of goods and services in an economy at a specific time, often tracked through indices like the CPI.

Inflation

The speed at which the ordinary price index for goods and services rises, devaluing the consumer's purchasing leverage.

Wealth Redistribution

The transfer of wealth from richer sections of society to poorer sections through mechanisms like taxation, welfare programs, or other state interventions.