Figure 3.2.4
-To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?
A) Makes the budget line steeper
B) Makes the budget line flatter
C) Parallel outward (rightward) shift
D) Parallel inward (leftward) shift
E) none of the above

Question

Figure 3.2.4
-To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?
A) Makes the budget line steeper 
B) Makes the budget line flatter 
C) Parallel outward (rightward) shift 
D) Parallel inward (leftward) shift 
E) none of the above

Quizplus · Accepted Answer

When the U.S. Congress passes an economic stimulus package that pays $300 to each person, it increases the purchasing power of consumers, which allows them to buy more goods at any given price level. Thus, the budget line for each consumer shifts parallel outward (rightward). The slope of the budget line remains the same because the relative prices of food and other goods are unaffected. Therefore, the correct answer is C.

Figure 3.2.4 -To Simplify Our Consumption Models, Suppose U.S. Consumers Only Purchase