The wealth effect:
A) explains the downward-sloping aggregate demand curve.
B) is the positive relationship between consumer spending and the overall price level.
C) is not present when wages keep pace with inflation.
D) explains how the aggregate demand curve shifts.

Question

Quizplus · Accepted Answer

The wealth effect explains the downward-sloping aggregate demand curve as it suggests that when the overall price level decreases, individuals feel wealthier and therefore, increase their spending. This leads to an increase in aggregate demand, resulting in a rightward shift in the aggregate demand curve.

The Wealth Effect