The Pigou effect is
A)the stimulus to aggregate demand from a fall in the interest rate.
B)the effect of a cut in taxes on the aggregate demand curve.
C)the effect of a fall in prices on aggregate demand curve.
D)the direct stimulus to consumption because of an increase in the real value of the money supply.

Question

Quizplus · Accepted Answer

The Pigou effect is a theory that describes the direct stimulus to consumption because of an increase in the real value of the money supply. It suggests that when the general price level falls, the real income and wealth of the consumers rise, leading to an increase in their purchasing power and consumption expenditure. Therefore, D is the correct answer. A is incorrect because it refers to the interest-rate effect. B is incorrect because it refers to the tax effect. C is incorrect because it refers to the wealth effect.

The Pigou Effect Is