When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____.
A) interest rate; aggregate demand; downward
B) wealth; aggregate demand; downward
C) interest rate; investment demand; downward
D) wealth; short-run aggregate supply; upward

Question

Quizplus · Accepted Answer

The wealth effect occurs when an increase in the aggregate price level reduces the purchasing power of people's assets, causing them to feel less wealthy and thus decreasing their willingness to spend. This leads to a decrease in aggregate demand, which is why the aggregate demand curve slopes downward.

When the Aggregate Price Level Increases, the Purchasing Power of Many