When the general price level rises:
A) investment falls as a result of the consumption link effect.
B) consumption increases as a result of the multiplier effect.
C) investment rises as a result of the wealth effect.
D) consumption falls as a result of the wealth effect.

Question

Quizplus · Accepted Answer

When the general price level rises, consumers' real incomes are reduced as they have to spend more to purchase the same quantity of goods and services. This reduction in the real income of consumers leads to a decrease in their purchasing power, which in turn leads to a decrease in consumption. This is known as the wealth effect. Therefore, choice D is the best answer.

When the General Price Level Rises