Answer to Question #308388 in Microeconomics for Kaya

Question

Due to substantial increases in prices in Country A, the real income level of the population in Country A decreases. Show on a diagram how the decrease in the income level in Country A will affect the demand for meat, which is a normal good. Also indicate how the equilibrium price and equilibrium quantity of meat will change in Country A. The direction of any changes should be clearly indicated using arrows.

Answer 1

Since the inflation rate in the country will cause a decrease in real income levels the money one makes after adjusting to the inflation reduces. This will result in to decrease in demand for meat since it is a normal good, it has a positive correlation between income and demand.

The graph below clearly shows this.