The Pigou Effect

question 92

Multiple Choice

The Pigou effect:

• A) suggests that as prices fall and real money balances rise, consumers should feel less wealthy and spend less.
• B) suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.
• C) suggests that as prices fall and real money balances rise, consumers should feel less wealthy but spend more.
• D) is generally accepted as adequate proof that the economy must be able to correct itself.

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Definitions:

Inflation Rate

The speed at which the average cost of products and services increases, leading to a decrease in the value of money.

Stagflation

An economic condition characterized by slow growth, high unemployment, and high inflation, presenting a challenging environment for monetary policy.

Aggregate Supply

Aggregate supply is the total supply of goods and services that firms in an economy are willing and able to produce at a given overall price level in a specific time period.

National Debt

The total amount of money that a country's government has borrowed by issuing securities, typically through bonds.