17. Which of the following statements are correct? A. An increase in the DJIA wo

Question

17. Which of the following statements are correct? A. An increase in the DJIA would increase household wealth, which will result in more household spending and thus a decrease in Yd. B. An increase in inflation will lower the real value of wealth and lower consumption thus reducing Yd. C. An acceleration in depreciation write-offs will result in tax savings accruing to businesses sooner. And the present value of the ENR stream will rise and expected rates of profit will likewise rise, resulting in an increase in investment spending and Yd will decrease. D. all of the above are correct. E. None of the above is correct.

Explanation / Answer

An increase in inflation will lower the real value of wealth and lower consumption thus reducing Yd this is true because inflation will decrease the real value of wealth.That means as price level increases, so people were able to buy less amount of product with their wealth from the pre inflation situation. For example suppose, a man is able to buy 2 apples at $1 when there is no inflation, but now when there is inflation the man can only buy 1 apple for that $1. And as price of product increases people consumes less which will lead to a fall in disposable income because consumption function is a relationship between consumption and disposable income.

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