The wealth effect says that if there is an increase in the price level, you will:
A) experience some reduction in your level of wealth as a result.
B) experience some increase in your level of wealth as a result.
C) typically spend more on all goods and services as a result.
D) typically shift your spending to assets from consumption goods.

Question

Quizplus · Accepted Answer

The wealth effect suggests that an increase in the price level will reduce the real value of people's assets, leading them to feel less wealthy. This is because the nominal values of their assets will remain the same, even though the purchasing power of those assets has decreased. As a result, people are likely to reduce their spending, leading to a decrease in aggregate demand.

The Wealth Effect Says That If There Is an Increase