An increase in the price level results in a decline in aggregate demand because people's "net worth" decreases and will spend less. This effect is called the:
A) interest rate effect.
B) income effect.
C) wealth effect.
D) trade effect.

Question

Quizplus · Accepted Answer

The wealth effect states that as the price level increases, the purchasing power of people's existing wealth declines, leading to a decrease in their consumption spending. Therefore, the correct answer is C, the wealth effect. The interest rate effect refers to changes in investment spending due to changes in interest rates. The income effect is the change in consumption patterns due to changes in income levels. The trade effect refers to changes in net exports due to changes in the price level.

An Increase in the Price Level Results in a Decline