In the new classical model, the wealth effect suggests that:
A) an increase in prices reduces people's wealth, so people spend less.
B) higher interest rates make people wealthier, so spending in the economy increases.
C) foreigners buy more U.S. goods when they feel wealthier.
D) prices do not affect the value of money.

Question

Quizplus · Accepted Answer

The wealth effect posits that when prices increase, the real value of money decreases, leading to a reduction in consumer wealth and consequently, a decrease in spending. This is because people feel poorer as their purchasing power diminishes.

In the New Classical Model, the Wealth Effect Suggests That