Pigou's Wealth Effect Suggests That When the Price Level Falls

question 43

Essay

Pigou's wealth effect suggests that when the price level falls, consumers feel wealthier and so increase their spending.Another implication of falling prices, however, is that the real value of dollar-denominated debts will increase.For example, if you owe $100, the real value of your debt goes up, and you are worse off.If someone owes you $100, then falling prices make you better off.Now suppose that on average those who borrow money tend to spend a larger fraction of their income than do those who lend money.Will spending rise or fall as a result of a fall in the price level?

---

Definitions:

Supplication

A strategy where an individual presents themselves as weak or dependent on others to gain sympathy or help.

Intimidation

A behavioral tactic involving the use of threats, fear, or coercion to influence others' actions or decisions.

Conscious Attitude

The attitude one is aware of having and can readily express or communicate to others.

Unconscious Attitude

Attitudes and preferences that influence an individual's behavior without their conscious awareness.