Changes in the price level necessarily cause the quantity demanded to change in the opposite direction to maintain the level of income. This effect is called which of the following?
A)the wealth effect
B)the constant-nominal-income effect
C)the substitution-of-foreign-goods effect
D)the investment effect

Question

Quizplus · Accepted Answer

The effect described is known as the constant-nominal-income effect, which suggests that changes in the price level lead to changes in the quantity demanded in the opposite direction to maintain the consumer's nominal income constant. The wealth effect refers to the impact of changes in asset prices on consumption, while the substitution-of-foreign-goods effect relates to the change in the demand for domestic goods due to changes in the relative prices of foreign goods. The investment effect pertains to the impact of changes in interest rates on investment spending.

Changes in the Price Level Necessarily Cause the Quantity Demanded