The change in people's purchasing power that occurs when the price of a good they purchase changes, assuming all else is held constant is known as
A) the substitution effect.
B) the real income effect.
C) the elasticity effect.
D) the multiplier effect.

Question

Quizplus · Accepted Answer

The change in purchasing power due to a change in the price of a good is known as the real income effect. It is a result of the change in the quantity of the good that can be purchased with a given amount of income. The substitution effect refers to the change in the quantity demanded of a good due to a change in its price relative to the price of other goods. The elasticity effect refers to the sensitivity of quantity demanded to price changes. The multiplier effect refers to the amplification of an initial change in spending or investment due to induced changes in spending by others.

The Change in People's Purchasing Power That Occurs When the Price