According to the wealth effect, if real wealth decreases then people
A) increase their consumption expenditure.
B) decrease their consumption expenditure.
C) do not respond if their nominal wealth does not change.
D) decrease their consumption expenditure only if their nominal wealth also decreases.

Question

Quizplus · Accepted Answer

According to the wealth effect, if real wealth decreases, people tend to decrease their consumption expenditure as they feel less wealthy and less able to afford the same level of consumption. This is because real wealth takes into account the purchasing power of nominal wealth, so if prices increase or the value of assets decreases, then real wealth decreases. Therefore, the best choice is B.

According to the Wealth Effect, If Real Wealth Decreases Then