According to the wealth effect, if the average price level rises, the value of consumers'
A)real wealth, nominal wealth, and consumption spending fall.
B)nominal wealth and consumption spending fall.
C)real wealth and consumption spending fall.
D)feel poorer and will save more.

Question

Quizplus · Accepted Answer

The wealth effect suggests that if the average price level rises, consumers' real wealth, which is the purchasing power of their wealth, decreases. This will lead to a decrease in consumption spending as consumers will have to allocate more of their income to pay for the same goods and services. Nominal wealth, which is the actual dollar value of wealth, may not necessarily fall, but its value in terms of purchasing power decreases due to inflation. Therefore, only choice C is correct. Option A is incorrect because nominal wealth may not necessarily fall, and consumption spending will also decrease. Option B is incorrect because real wealth also decreases. Option D is incorrect because consumers will not feel poorer necessarily, but their real wealth will decrease, which will lead to a decrease in consumption spending.

According to the Wealth Effect, If the Average Price Level