Chapter 46, Income Effects, Substitution Effects, and Elasticity Video Solutions, Krugman's Economics for AP

Problem 1

Which of the following occurs as a result of the recession in Mexico?
I. Output in Mexico decreases.
II. Aggregate demand in the United States decreases.
III. Output in the United States decreases.
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III

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Problem 1

Which of the following statements is true?
I. When a good absorbs only a small share of the typical consumer's income, the income effect explains the demand curve's negative slope.
II. A change in consumption brought about by a change in purchasing power describes the income effect.
III. In the case of an inferior good, the income and substitution effects work in opposite directions.
a. I only
b. II only
c. III only
d. II and III only
e. I, II, and III

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Problem 2

What is the effect of Mexico's falling income on the demand for money and the nominal interest rate in Mexico?
Demand for money
a. increases
b. decreases
c. increases
d. decreases
e. increases
Nominal interest rate
decreases
decreases
increases
increases
unchanged

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Problem 2

If there is an increase in the price of an inferior good on which consumers spend a large share of their income, which of the following will decrease the quantity of that good demanded?
a. the Giffen effect
b. the income effect only
c. the substitution effect only
d. the income effect and the substitution effect
e. neither the income effect nor the substitution effect

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08:24

Problem 3

Given what happens to the nominal interest rate, if the aggregate price level in Mexico decreases, what will happen to the real interest rate?
a. It will increase.
b. It will decrease.
c. It will be unchanged.
d. It will stabilize.
e. It cannot be determined.

Kanishk Mishra

Numerade Educator

01:52

Problem 3

If a decrease in price from $\$ 2$ to $\$ 1$ causes an increase in quantity demanded from 100 to 120 , using the midpoint method, price elasticity of demand equals
a. 0.17 .
b. 0.27 .
c. 0.40 .
d. 2.5 .
e. 3.72 .

Anand Jangid

Numerade Educator

Problem 4

Suppose the aggregate price level in Mexico decreases relative to that in the United States. What is the effect of this price level change on the demand, and on the exchange rate, for Mexican pesos?
Demand for pesos
Exchange rate
a. increases appreciates
b. increases depreciates
c. decreases appreciates
d. decreases depreciates
e. decreases is unchanged

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07:56

Problem 4

Which of the following is likely to have the highest price elasticity of demand?
a. eggs
b. beef
c. housing
d. gasoline
e. foreign travel

Khalida Dawar

Numerade Educator

Problem 5

If the Mexican government pursues expansionary fiscal policy in response to the recession, what will happen to aggregate demand and aggregate supply in Mexico in the short run?
Aggregate demand
Short-run aggregate supply
a. increases increases
b. increases decreases
c. decreases increases
d. decreases decreases
e. increases is unchanged

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01:44

Problem 5

If a $2 \%$ change in the price of a good leads to a $10 \%$ change in the quantity demanded of a good, what is the price elasticity of demand?
a. 0.02
b. 0.2
c. 5
d. 10
e. 20

Jasper Baltz

Numerade Educator