The Pigou effect:
A) suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less.
B) suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.
C) suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more.
D) is generally accepted as adequate proof that the economy must be able to correct itself.

Question

Quizplus · Accepted Answer

The Pigou effect suggests that as prices fall and real money balances rise, consumers should feel wealthier and therefore spend more. This is because the real value of their money has increased, making them feel more financially secure and able to make purchases they may have put off at higher prices. However, this effect is not always a reliable economic phenomenon and may not always lead to an increase in consumer spending.

The Pigou Effect