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:

Consumer Price Index

An index that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Effective Annualized Rate

The interest rate on an investment or loan on an annual basis, taking compounding into account.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Effective Interest Rate

The actual annual interest rate that an investor earns or pays, taking into account the effect of compounding over the period.