If the price level rises, then the wealth effect leads to
A)a decrease in real wealth, an increase in current consumption expenditure, and an increase in saving.
B)an increase in real wealth, an increase in current consumption expenditure, and an increase in saving.
C)an increase in real wealth, an increase in current consumption expenditure, and a decrease in saving.
D)a decrease in real wealth, a decrease in current consumption expenditure, and an increase in saving.
E)a decrease in real wealth, an increase in current consumption expenditure, and a decrease in saving.

Question

Quizplus · Accepted Answer

The wealth effect states that an increase in the price level results in a decrease in real wealth (as the purchasing power of money decreases). As a result, consumers tend to reduce their current consumption expenditure (to compensate for the decrease in real wealth) and increase their saving (to try to maintain their overall level of wealth over time). Therefore, option D is the best choice.

If the Price Level Rises, Then the Wealth Effect Leads