Which of the following correctly describes how a decrease in the price level affects consumption spending?
A)A decrease in the price level raises real wealth, which causes consumption to increase.
B)A decrease in the price level decreases the amount of money a household needs to buy goods and so raises the interest rate, which causes consumption to increase.
C)A decrease in the price level increases the amount of money a household needs to buy goods and so raises the interest rate, which causes consumption to increase.
D)A decrease in the price level lowers real wealth, which causes consumption to decrease.

Question

Quizplus · Accepted Answer

A decrease in the price level increases the purchasing power of households, making them feel richer, and hence they spend more. This is because the goods and services are now relatively cheaper than before and their real wealth, which is the ratio of nominal wealth to the price level, increases. This increase in real wealth leads to an increase in consumption spending as households are more likely to spend on more goods and services.

Which of the Following Correctly Describes How a Decrease in the Price