Suppose That an Increase in the Price Level Reduces the Value

question 45

Multiple Choice

Suppose that an increase in the price level reduces the value of real wealth,which then causes a reduction in consumption but no change in saving.In this case,there is

• A) both an interest rate effect and a wealth effect.
• B) no wealth effect.
• C) an interest rate effect but no wealth effect.
• D) a wealth effect but no interest rate effect.
• E) no wealth effect and no interest rate effect.

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Definitions:

Effective Interest Method

The effective interest method is an accounting practice used to amortize bond premiums or discounts over the life of the bond, producing a constant rate of interest over the period.

Semiannual Interest Date

The twice-yearly date on which interest payments are made to bondholders or lenders.

Discount

A reduction from the usual cost of something, often used as a sales strategy to encourage purchases.

Amortize

The process of spreading out a loan or intangible asset cost over a specific period of time for accounting and tax purposes.