In April, 80% of the American population gets an income tax rebate

In April, 80% of the American population gets an income tax rebate. What happens to the price and quantity of all normal goods?

The correct answer and explanation is:

Correct Answer:
Both the price and quantity of all normal goods increase.

Explanation (300 words):

When 80% of the American population receives an income tax rebate in April, it effectively increases their disposable income. This change has a direct impact on consumer behavior, especially in relation to normal goods.

Normal goods are those goods for which demand increases as consumer income increases. Examples include clothing, electronics, dining out, and home improvement products. Since a tax rebate puts more money in people’s pockets, they are more likely to spend on these goods.

According to the law of demand, as income increases, the demand curve for normal goods shifts to the right. This shift represents an increase in demand at every price level. Now, with 80% of the population receiving more income, the cumulative effect is a significant rise in demand across a wide range of goods.

In response to the increased demand:

• Quantity demanded increases, leading to greater quantity sold.
• Prices tend to rise as producers react to higher demand and possibly constrained short-run supply.

This outcome is best explained using demand and supply analysis. When the demand curve shifts rightward and the supply curve remains unchanged (at least in the short term), the new equilibrium shows both a higher price and greater quantity.

Moreover, businesses might not be able to immediately increase supply due to production constraints, further contributing to upward pressure on prices.

This situation reflects a positive demand shock, a typical scenario in macroeconomics where government policies (like tax rebates or stimulus checks) can lead to increased consumer spending, economic growth, and sometimes inflationary pressure.

Therefore, following the tax rebate:

• The quantity of all normal goods purchased increases.
• The prices of these goods also increase due to higher demand.