The "Pigou effect" is the stimulus to aggregate demand when a lower price level causes
A)a lower interest rate to increase fixed investment.
B)a lower interest rate to increase inventory investment.
C)a lower interest rate to increase the demand for consumer durables.
D)holdings of money to increase in purchasing power,thus raising consumption demand.

Question

Quizplus · Accepted Answer

The Pigou effect states that when the price level decreases, the purchasing power of money increases, leading to an increase in consumption demand. This is because individuals now have more money to spend on goods and services, leading to an increase in aggregate demand. Option D is the only choice that reflects this concept. Option A is incorrect because a lower interest rate would increase investment demand, not consumption demand. Option B is incorrect because a lower interest rate would increase borrowing and investment in inventory, not consumption demand. Option C is incorrect because a lower interest rate would increase borrowing and investment in consumer durables, not consumption demand.

The "Pigou Effect" Is the Stimulus to Aggregate Demand When