ECONOMICS
AGGREGATE DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
real wealth increases, consumption decreases, and aggregate demand decreases.
|
|
|
real wealth decreases, consumption decreases, and aggregate demand decreases.
|
|
|
real wealth increases, consumption increases, and aggregate demand increases.
|
|
|
real wealth decreases, consumption increases, and aggregate demand increases.
|
Detailed explanation-1: -If the price level rises, whatever wealth people is worth less in real terms. This is because an increase in price levels causes a fall in the value of money. As people see their wealth falling in real terms, they curtail their consumption of goods and services.
Detailed explanation-2: -At the higher price level, the consumption, investment, and net export components of aggregate demand will all fall; that is, there will be a reduction in the total quantity of goods and services demanded, but not a shift of the aggregate demand curve itself.
Detailed explanation-3: -The intuition behind the real wealth effect is that when the price level decreases, it takes less money to buy goods and services. The money you have is now worth more and you feel wealthier. So, in response to a decrease in the price level, real GDP will increase.
Detailed explanation-4: -Wealth Effect Consumer wealth responds inversely to changes in price. At higher price levels or higher interest rates, the purchasing power (or real wealth) of consumers reduces, since they have to spend more to acquire each unit of a commodity.
Detailed explanation-5: -the change in the quantity of aggregate demand that results from wealth changes due to price-level changes.-a rise in prices all over the economy reduces real wealth in the economy, and then the quantity of aggregate demand falls.