The wealth effect is the tendency for
A) changes in the price level to change nominal wealth and consumption.
B) changes in the price level to change real wealth and consumption.
C) household wealth to fluctuate with changes in the level of economic activity.
D) the marginal propensity to rise with increases in wealth.

Question

Quizplus · Accepted Answer

The wealth effect is the tendency for changes in the price level to change real wealth and consumption. As prices decrease, the real value of wealth increases, which leads to an increase in consumption. Conversely, as prices increase, the real value of wealth decreases, which leads to a decrease in consumption. Therefore, the wealth effect shows the relationship between changes in price levels and changes in real wealth and consumption.

The Wealth Effect Is the Tendency for