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AP® Macroeconomics

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Example of the Wealth Effect

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Which of the following is the best example of the wealth effect theory in macroeconomics?

A

The price level increases, so suppliers feel wealthier and therefore increase hiring with the result of increased aggregate demand.

B

The price level decreases, therefore real wages decrease for demanders thereby triggering a decrease in aggregate demand.

C

The price level decreases, so demanders increase consumption thereby increasing aggregate supply.

D

The price level increases, thereby making demanders feel poorer so they decrease demand for output.

E

The price level decreases, thereby allowing suppliers to increase employment because labor is more prepared to accept lower wages and salaries due to the lower cost of living.