One reason the amount of real output demanded declines when the aggregate price level rises is the result of a reduction in household wealth called the _____ effect.
A) income
B) substitution
C) wealth
D) interest rate

Question

Quizplus · Accepted Answer

The wealth effect refers to the decrease in the purchasing power of a given amount of household wealth due to an increase in the aggregate price level. With higher prices, the same amount of wealth can buy fewer goods and services, reducing the real value of households' savings and assets. As a result, households tend to consume less, causing a decline in the demand for goods and services, and a decrease in real output.

One Reason the Amount of Real Output Demanded Declines When