An Increase in Household Wealth That Creates a Wealth Effect

question 138

Multiple Choice

An increase in household wealth that creates a wealth effect would shift the:

• A) Consumption schedule and the saving schedule upward
• B) Consumption schedule and the saving schedule downward
• C) Consumption schedule upward and the saving schedule downward
• D) Consumption schedule downward and the saving schedule upward

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Definitions:

Expected Value

The calculated average of all possible values for a random variable, weighted by their probabilities of occurrence.

Lottery

A form of gambling involving the drawing of numbers at random for a prize, often run by state or federal governments.

Risk Aversion

A preference for avoiding risk, where individuals or organizations opt for lower-risk options even when higher risks may offer greater potential rewards.

Adverse Selection

Refers to the fact that “bad types” are likely to be selected in transactions where one party is better informed than the other. Examples include higher risk individuals being more likely to purchase insurance, more low-quality cars (lemons) being offered for sale, or lazy workers being more likely to accept job offers. Adverse selection is a precontractual problem that arises from hidden information about risks, quality, or character.