The change in consumption brought about by a change in purchasing power of savings that results from a change in the price level is the
A) consumption effect.
B) money supply effect.
C) real wealth effect.
D) interest rate effect.

Question

Quizplus · Accepted Answer

The change in consumption resulting from a change in purchasing power due to a change in the price level is known as the real wealth effect. As prices rise, the purchasing power of savings declines, leading to a decrease in real wealth and thus a decrease in consumption. Conversely, as prices fall, the purchasing power of savings increases, leading to an increase in real wealth and thus an increase in consumption. The other answer choices - consumption effect, money supply effect, and interest rate effect - are all related to different factors that can affect consumption, but they are not specifically tied to changes in the price level.

The Change in Consumption Brought About by a Change in Purchasing