The wealth effect explains why the:
A) aggregate demand curve slopes downward since changes in aggregate price levels change the purchasing power of people's assets.
B) aggregate supply curve slopes upward since an increase in wealth leads to more consumption.
C) aggregate supply curve shifts since changes in wealth affect production.
D) aggregate demand curve slopes upward since wealth allows consumers to purchase more regardless of the price level.

Question

Quizplus · Accepted Answer

The wealth effect refers to the change in consumption that results from a change in perceived wealth. When individuals or households feel that the value of their assets, such as their homes or investments, has increased, they tend to spend more because they feel "wealthier." This leads to an increase in aggregate demand, as more goods and services are being demanded at each price level. Therefore, the wealth effect is an important factor in explaining why the aggregate demand curve slopes downward, as changes in aggregate price levels change the purchasing power of people's assets.

The Wealth Effect Explains Why The