Ben N. Jerry prefers to keep his $10,000 retirement savings buried in the backyard. After an increase in the price level, Ben reduces the amount of goods and services he wants to purchase. Ben's rationalization, that now his retirement savings won't buy as much, is consistent with which explanation of the aggregate demand curve's negative slope?

Question

Quizplus · Accepted Answer

The wealth effect states that as the price level increases, the real value of assets (like retirement savings) decreases, leading to a decrease in consumer spending and a shift in the aggregate demand curve to the left. This is consistent with Ben's decision to reduce his purchases due to the reduced purchasing power of his retirement savings.

Ben N Jerry Prefers to Keep His $10,000 Retirement Savings Buried