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.

Answer 1

The money earned after correcting for inflation declines because the country's inflation rate produces a drop in real income levels. Meat is a common good with a positive link between income and demand, thus there will be a drop in demand.

The diagram below illustrates this point.