Which of the Following Phrases Best Describes the Wealth Effect

question 6

Multiple Choice

Which of the following phrases best describes the wealth effect?

• A)When the overall price level increases, ceteris paribus, domestic goods and services become relatively more expensive and foreign goods become relatively cheaper.
• B)When income or wealth increase, consumption is likely to decrease.
• C)If the price level increases while the nominal money supply remains constant, the supply of real money balances decreases and spending units experience a loss of purchasing power.
• D)When the price level rises, the quantity demanded of real GDP must fall in accordance with the constant nominal income constraint. In short, less is demanded at higher prices because the funds run out sooner.

---

Definitions:

Production Function

Describes the relationship between inputs used in production and the resulting output.

Long Run

A period of time in economics during which all factors of production and costs are variable, allowing for full industry adjustment.

Diseconomies Of Scale

Situations where a firm's costs per unit increase as the scale of production increases, typically due to inefficiencies that arise from becoming too large.

Diminishing Returns

A principle stating that if one input in the production of a commodity is increased while other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.