The Pigou effect implies that:
A)when the price level decreases, consumer purchasing power goes up, and therefore consumers spend more
B)when consumers spend more, the price level increases
C)when consumer income increases, consumers spend more
D)when the price level decreases, consumers save more, and therefore become wealthier

Question

Quizplus · Accepted Answer

The Pigou effect is an economic theory which states that a decrease in the price level leads to an increase in real wealth, which stimulates consumer spending and leads to an increase in economic activity. When the price level decreases, the purchasing power of consumers increases. This means that they can buy more goods and services for the same amount of money. As a result, consumers are more likely to increase their spending, which can lead to an overall increase in demand and economic growth.

The Pigou Effect Implies That