According to the wealth effect, aggregate demand slopes downward (negatively) because lower prices
A) increase the value of money holdings and consumer spending increases.
B) decrease the value of money holdings and consumer spending decreases.
C) reduce money holdings, increase lending, interest rates fall, and investment spending increases.
D) increase money holdings, decrease lending, interest rates rise, and investment spending falls.

Question

Quizplus · Accepted Answer

According to the wealth effect, lower prices increase the real value of money holdings, which makes people feel wealthier and more willing to spend, thereby increasing consumer spending and aggregate demand.

According to the Wealth Effect, Aggregate Demand Slopes Downward (Negatively)