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

Question

Quizplus · Accepted Answer

The wealth effect posits that when the price level decreases, the real value of money and financial assets increases, which makes people feel wealthier. This increase in perceived wealth typically leads to an increase in consumption spending, as individuals are more inclined to spend when they feel wealthier.

The Wealth Effect Suggests That A