-In the above figure, the economy initially is at point B. Then price level rises by 10. The wealth effect will help
A) move the economy to point A.
B) move the economy to point C.
C) move the economy to point D.
D) keep the economy at point B.

Question

-In the above figure, the economy initially is at point B. Then price level rises by 10. The wealth effect will help
A) move the economy to point A. 
B) move the economy to point C. 
C) move the economy to point D. 
D) keep the economy at point B.

Quizplus · Accepted Answer

The wealth effect refers to the change in consumer spending that results from a change in the value of wealth, including the value of assets. When the price level rises, the real value of money decreases, leading consumers to feel poorer and thus spend less. This decrease in consumption would shift the economy from a point of higher aggregate demand (like B) to a point of lower aggregate demand (like C), as consumers cut back on spending due to feeling less wealthy.

-In the Above Figure, the Economy Initially Is at Point