The wealth effect indicates that:
A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C) a higher price level will increase the real value of many financial assets and therefore increase spending.
D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Question

Quizplus · Accepted Answer

The wealth effect suggests that when the price level increases, the real value of money and financial assets decreases, leading to reduced consumption and investment spending. This is because people feel less wealthy.

The Wealth Effect Indicates That