An Individual Holds $10,000 in a Non-Interest-Earning Checking Account, and the Overall

question 209

Multiple Choice

An individual holds $10,000 in a non-interest-earning checking account, and the overall price level rises significantly. Other things being constant, we would expect

• A) the individual's real wealth to decrease and consumption to decline.
• B) the individual's stock of real wealth to decrease but real national income to increase.
• C) no change in the individual's real wealth but a decline in real national product.
• D) the individual's wealth to increase.

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Definitions:

Status Quo Bias

The tendency for people to prefer things to stay the same by doing nothing or sticking with a decision made previously.

Prospect Theory

A psychological theory that describes how people make decisions based on the potential value of losses and gains rather than the final outcome.

Endowment Effect

A psychological phenomenon where people ascribe more value to things merely because they own them.

Prospect Theory

A behavioral economic theory that describes how people make decisions under conditions of risk and uncertainty, prioritizing losses differently from gains.