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According to the wealth effect explanation for why the aggregate demand curve slopes downward, what happens to consumption spending when the price level rises?
AConsumption rises, since higher prices signal growth
BConsumption falls as inflation erodes savings buying power
CConsumption stays fixed no matter the price level
DConsumption falls only for imported goods, not domestic ones
Answer & Solution
Correct answer: B. Consumption falls as inflation erodes savings buying power
1. The wealth effect looks at how a rising price level changes what people's existing savings can actually buy.
2. Inflation erodes the real value of money already saved in banks and other assets.
3. Feeling poorer in real terms, people cut back on consumption spending.
4. This falling consumption is one reason the AD curve slopes down, not up, ruling out option A.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.2 | Building a Model of Aggregate Demand and Aggregate Supply_
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