Which of the following helps explain why the aggregate quantity demanded of goods and services is inversely related to prices within the framework of the AD/AS model?
A) As prices fall, domestic consumers have an incentive to buy less of the cheaper goods and services.
B) As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the quantity of goods and services purchased.
C) As prices fall, the government will have to reduce taxes, which will lead to an increase in the quantity of goods and services purchased.
D) As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services.

Question

Quizplus · Accepted Answer

As prices fall, the real value of the fixed quantity of money held by individuals increases, which motivates them to spend more money on goods and services. This is known as the wealth effect, and it is a key factor in why the aggregate quantity demanded of goods and services decreases as prices rise, and increases as prices fall in the AD/AS model.

Which of the Following Helps Explain Why the Aggregate Quantity