What can income elasticity of demand tell us about the nature of ...

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What can income elasticity of demand tell us about the nature of a good?
 
  What will be an ideal response?

Question 2

If the current unemployment rate is 5, under which of the following circumstances would you expect the Fed to use contractionary monetary policy?
 
  A) if the inflation rate is above 5
  B) if the inflation rate is below 5
  C) if the natural rate of unemployment is below 5
  D) if the natural rate of unemployment is above 5

[jlaineee]

Answer to Question 1

The income elasticity of demand for a good equals the percentage change in quantity demanded of a good due to a percentage change in the consumer's income. Using income elasticity, products can be classified as normal goods or inferior goods. Goods with an income elasticity above 1 are called luxury goods. An income elasticity which is above 0 but less than 1 indicates that the good is normal. Inferior goods will have a negative income elasticity.

Answer to Question 2

D

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Excellent

[milbourne11]

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