One explanation for the negative slope of the aggregate demand curve is the \"we

Question

One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real-balances" effect). What is this effect? As inflation occurs, the purchasing power of consumers increases as accumulated wealth Increases in value. As inflation occurs, consumers buy fewer goods and o services because the value of their accumulated wealth declines. Interest rates increase when prices rise as consumers try to borrow larger amounts of money to maintain their consumption The higher interest rate discourages spending. For normal goods, people buy more of a product if their income increases. According to the wealth effect, what happens as the price level falls? Consumption and investment spending increase. Consumption and investment spending decrease. Consumption spending increases. consumption spending decrease and investment spending increases. Consumption spending decreases. Consumption spending increases and investment spending decreases.

Explanation / Answer

1) B

As inflation occurs consumers real value of assets decrease, leading to lower spending

2) C

If price level falls, Then consumers will feel confident and they go ahead with more spending,

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