A Rise in the Price Level Has a Direct Effect

question 94

Multiple Choice

A rise in the price level has a direct effect on spending because

• A) people like to spend more when prices are higher.
• B) the real value of the money people have varies directly with the price level.
• C) the real value of the money people have decreases and they can buy less with it.
• D) a higher price gives people more money, and so the more goods and services they can buy.

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Definitions:

Endowment Effect

A mental prejudice in which individuals attribute higher worth to items simply because they possess them.

Prospect Theory

A behavioral economic theory that describes how people make decisions between probabilistic alternatives that involve risk, where the outcomes are known.

Identical Item

A product or object that is exactly the same in every aspect as another, with no variations.

Status Quo Bias

The preference for the current state of affairs, where changes are resisted even when better options are available.