The wealth effect along an aggregate-demand curve stems from the idea that a higher price level
A)increases the real value of households' money holdings.
B)decreases the real value of households' money holdings.
C)increases the real value of the domestic currency in foreign-exchange markets.
D)decreases the real value of the domestic currency in foreign-exchange markets.

Question

Quizplus · Accepted Answer

The wealth effect suggests that as the price level increases, the real value of households' money holdings decreases, which in turn reduces their ability to purchase goods and services, affecting aggregate demand negatively.

The Wealth Effect Along an Aggregate-Demand Curve Stems from the Idea