When the general price level rises,
A) consumption falls as a result of the real wealth effect.
B) consumption increases as a result of the multiplier effect.
C) investment rises as a result of the real wealth effect.
D) investment rises as a result of the multiplier effect.

Question

Quizplus · Accepted Answer

When the general price level rises, the purchasing power of consumers decreases. This leads to a decrease in consumption as the real wealth effect takes place. Consumers are unable to purchase the same amount of goods and services with their income due to the rise in prices, leading to a decline in overall consumption.

When the General Price Level Rises