Which of the following best describes the "wealth effect"?
A)When the price level falls, the real value of household wealth falls.
B)When the price level falls, the nominal value of household wealth falls.
C)When the price level falls, the nominal value of household wealth rises.
D)When the price level falls, the real value of household wealth rises.
E)When the price level falls, the value of stocks rise.

Question

Quizplus · Accepted Answer

The wealth effect is the change in spending that accompanies a change in perceived wealth. When the price level (inflation) falls, the purchasing power of money increases, leading to an increase in the real value of household wealth. As a result, consumers feel wealthier and increase their spending, which stimulates economic growth.

Which of the Following Best Describes the "Wealth Effect