An individual holds $20 000 in an interest-earning checking account earning 10% interest,and the overall price level rises by 12%.Other things constant,we would expect
A)the individual's real wealth to decrease and consumption to diminish.
B)the individual's stock of real wealth to decrease but real national income to increase.
C)no change in the individual's real wealth but a decline in real national product.
D)real wealth has gone down by 12%.

Question

Quizplus · Accepted Answer

The overall price level rising by 12% means that the purchasing power of the $20 000 held in the checking account has decreased by 12%. This results in a decrease in the individual's real wealth. As a result, the individual may choose to decrease their consumption in order to maintain their savings.

An Individual Holds $20 000 in an Interest-Earning Checking Account