According to the wealth effect aggregate demand slopes downward (negatively) because ?
Correct answer: A. lower prices increase the value of money holding and consumers spending increase
- A. lower prices increase the value of money holding and consumers spending increase
- B. lower prices decrease the value of money holding and consumers spending decrease
- C. lower prices reduce money holding increase lending, interest rates fall and investment spending increase
- D. lower prices increase money holding decrease lending, interest rates rise and investment spending falls
Explanation
When prices fall, existing money balances have greater real purchasing power, making households feel wealthier and increasing consumption. This wealth effect helps explain why aggregate demand slopes downward.
Report an error
The more specific you are, the faster it gets fixed. A source beats an opinion.
Prefer email? [email protected]
About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
Practise Macroeconomics
1,499 free Macroeconomics MCQs from Economics, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Discussion
Stuck on an option, or know a faster way to get there? Ask or explain it here.
No comments yet. Be the first to explain this one.
Exams that ask Economics questions like this
Economics is on 3 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
More Macroeconomics questions
Suppose the price level falls but because of fixed nominal wage contracts the real wage rises and firms cut back on production This is a demonstration of the ?
Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the short run ?
Suppose the economy is initially is long run equilibrium Then suppose there is a drought that destroys much of the wheat crop According to the model of aggregate demand and aggregate supply, what happens of prices and output in the short run ?
Which of the following is not a reason why the aggregate demand curve slopes downward ?
According to the interest rate effect aggregate demand slopes downward (negatively) because ?
Policy makers are said to "accommodate" an adverse supply shock if they ?