Certified Financial Planner (CFP) Exam 2026 – 400 Free Practice Questions to Pass the Exam

The statement that demand increases with a higher average income is correct due to the relationship between income levels and consumer purchasing power. As average income rises, consumers generally have more disposable income available, allowing them to purchase more goods and services. This phenomenon often leads to an increase in demand for normal goods, which are goods that consumers buy more of as their income increases.

In economic theory, demand is influenced by several factors, including consumer preferences, the price of goods, and consumer income. When income levels rise, individuals are willing and able to buy more, shifting the demand curve to the right. This indicates that at every price level, consumers want to purchase more of a product, hence the increase in demand.

Understanding this principle is vital because it helps in predicting consumer behavior in response to changes in economic conditions, which is essential for effective financial planning and investment strategies.

Other options might confuse changes in demand with movements along a demand curve, which is a separate concept. The demand curve reflects the relationship between price and quantity demanded, typically illustrating that a decrease in price leads to an increase in quantity demanded for a given product. Similarly, higher prices generally lead to a decrease in quantity demanded. Therefore, recognizing how income affects overall demand rather than just reflecting price