Suppose that an increase in the price level reduces the value of real wealth,which then causes a reduction in consumption but no change in saving.In this case,there is
A) both an interest rate effect and a wealth effect.
B) no wealth effect.
C) an interest rate effect but no wealth effect.
D) a wealth effect but no interest rate effect.
E) no wealth effect and no interest rate effect.

Question

Quizplus · Accepted Answer

The reduction in real wealth directly affects the consumption, which indicates a wealth effect. However, as there is no change in saving, there is no corresponding change in interest rates, indicating no interest rate effect. Therefore, the correct answer is D, a wealth effect but no interest rate effect.

Suppose That an Increase in the Price Level Reduces the Value