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.
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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.
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