Question

1. Suppose the wages of the cafeteria workers on campus increase by 10% forcing the price of meals to increase at the same time your scholarship income doubles. (Cafeteria meals are an inferior good.) How will these changes impact the quantity and price levels in the cafeteria food market?
Quantity / Price

Increase / Indeterminate
Increase / Decrease
Decrease / Indeterminate
Indeterminate / Decrease

2. Which of the following would cause an increase in aggregate demand?
I. Congress cuts personal income taxes.
II. The degree of excess capacity increases.
III. The quantity demanded of imports increases.

I only.
II only.
III only.
I and II only.
I, II, and III.

3. Which of the following will cause an increase in aggregate demand?

an increase in imports.
an increase in exports.
a decrease in consumer spending.
a decrease in national income.
a decrease in business expansion.

Answer 1

The correct options are as follows:
1. DECREASE / INDETERMINATE.
We are told in the question that cafeteria meals are inferior goods. An inferior good is a type of good whose demand decreases as the income of the consumer increases. That is, when the income of a consumer increases, such consumer will buy less of inferior goods and instead move on to buy goods that are more expensive. Thus, the demand for an inferior good will decrease as the income of the consumer increases. People usually buy inferior goods when they have low incomes, immediately their income increases, they move on to buy more expensive goods. Examples of inferior goods are: cheap cars, cheap frozen foods, intercity bus services, etc.

2. I, II AND III
Aggregate demand refers to the total demand for goods and services in a particular economy at a given point in time. The factors that affect aggregate demand include: consumers' expenditures, investment spending on capital goods, government spending and foreign goods. Shifts in these factors will either increase or decrease the aggregate demand. The following factors increase the aggregate demand: When the government reduces the income taxes paid by workers, increases in excess capacity and increase in quantity of foreign goods demanded.

3. AN INCREASE IN EXPORT.
An increase in the amount of goods exported by a country will lead to an increase in the amount of foreign incomes earn by the country, this in turn will increase the spending capacity of that country. Thus, increase in foreign incomes earn by an economy leads to increase in aggregate demand.