The income effect refers to a change in:
A) income because of changes in the CPI.
B) the quantity demanded of a good because of a change in the buyer's real income.
C) the quantity demanded of a good because of a change in the buyer's money income.
D) none of these.

Question

Quizplus · Accepted Answer

The income effect refers to the change in quantity demanded of a good because of a change in the buyer's real income. Real income is the income adjusted for inflation, and when it changes, it affects the purchasing power of the buyer. As a result, the buyer may either increase or decrease the demand for a particular good, depending on whether the change in real income was positive or negative. Therefore, option B correctly defines the income effect. Option A is incorrect because changes in the CPI do not directly affect income, but indirectly affect the purchasing power of income. Option C is incorrect because changes in the buyer's money income do not necessarily result in a change in the quantity demanded of a good. Option D is incorrect because one of the options is correct.

The Income Effect Refers to a Change In