In the context of aggregate demand and aggregate supply,the wealth effect refers to the idea that,when the price level decreases,the real wealth of households
A)increases and as a result consumption spending increases.This effect contributes to the downward slope of the aggregate-demand curve.
B)decreases and as a result consumption spending increases.This effect contributes to the upward slope of the aggregate-supply curve.
C)increases and as a result households increase their money holdings;in turn,interest rates increase and investment spending decreases.This effect contributes to the downward slope of the aggregate-demand curve.
D)decreases and as a result households increase their money holdings;in turn,interest rates increase and investment spending decreases.This effect contributes to the upward slope of the aggregate-supply curve.

Question

Quizplus · Accepted Answer

The wealth effect states that when the price level decreases and the purchasing power of households increases, their real wealth also increases. As a result, their consumption spending increases, leading to a higher quantity demanded and contributing to the downward slope of the aggregate-demand curve.

In the Context of Aggregate Demand and Aggregate Supply,the Wealth