Higher rates of inflation reduce spending because:
A) the Fed reacts to the higher inflation by lowering interest rates.
B) the reduction in wealth, resulting from the reduced real value of money, restricts spending.
C) resources are redistributed from low-spending households to high-spending households.
D) the real value of money increases.

Question

Quizplus · Accepted Answer

At high levels of inflation, the purchasing power of money held by the public declines, reducing the public's real wealth. This may cause households to restrict consumption spending. This is one of the reasons for the downward slope of the AD curve.

Higher Rates of Inflation Reduce Spending Because