Question

Rising future prices (P)...

		cause both a substitution effect and an income effect
		cause a decrease in real income
		cause the budget line to rotate around the maximum consumption point on the Year 1 axis and a decrease in the slope of the budget line
		all of the above

Expectation of deflation can help an economy expand because...

		Consumption is a normal good - lower prices in the future cause a positive income effect in year 1.
		Consumption is a normal good and lower prices in the future cause a substitution to consumption in year 1
		Consumption is not a normal good, so we cannot determine the results
		None of the above

When interest rates rise

		real income falls for borrowers
		real income increases for savers
		current loans become more expensive for borrowers
		current consumption decreases for borrowers
		all of the above

When interest rates rise...

		future consumption becomes cheaper relative to present consumption
		the consumption alternatives open to a household change
		borrowers will substitute out of current consumption
		savers will substitute out of current consumption
		all of the above

When income rises today OR in the future...

		we can expect consumption to increase in year 2 only
		We can expect consumption to increase in year 1 only
		We can expect consumption to increase in year 1 AND year 2
		None of the above

Answer 1

Q1. Option d
With the increase in prices, people substitute for low priced goods, reduce consumption of a good to meet the budget

Q2. Option d
With the deflationary pressure the consumption spending deceases which leads to lower economic growth

Q3. Option d

Q4. Option d. As it favors savers and reduces spending

Q5. Option c