According to the wealth effect, if real wealth decreases then people
A) decrease their consumption expenditure.
B) increase their consumption expenditure.
C) do not respond if their nominal wealth does not change.
D) decrease their consumption expenditure only if their nominal wealth also decreases.

Question

Quizplus · Accepted Answer

The wealth effect posits that when real wealth decreases, people feel less wealthy and are likely to decrease their consumption expenditure as a result. This is because they perceive themselves as having less financial security or purchasing power.

According to the Wealth Effect, If Real Wealth Decreases Then