Which of the following effects provide incentives for consumers to spend less when the price level rises?
A)the wealth effect and the interest-rate effect
B)the wealth effect but not the interest-rate effect
C)the interest-rate effect but not the wealth effect
D)neither the wealth-effect nor the interest rate effect

Question

Quizplus · Accepted Answer

The wealth effect and the interest-rate effect both provide incentives for consumers to spend less when the price level rises. The wealth effect occurs when the price level rises, reducing the purchasing power of the consumer's wealth. As a result, consumers may cut back on spending to compensate for the loss of purchasing power. The interest-rate effect occurs when the price level rises, leading to an increase in the demand for money, which raises interest rates. This, in turn, discourages borrowing and makes saving a more attractive option, leading consumers to spend less.

Which of the Following Effects Provide Incentives for Consumers to Spend