Question

Consider the​ downward-sloping aggregate demand​ (AD) curve to the right. Which of the following results in a movement from point A to point B​ (a movement up along the AD​ curve) or from point A to point C​ (a movement down along the AD​ curve)

A) Inflation effect
B) Multiple effect
C) Welath effect
D) Interest rate effect

Answer 1

B. Wealth Effect

Step-by-step explanation:

First, let's remind that downward-sloping aggregate demand means that as the price level falls, the demanded output quantity rises. There are mainly three reasons that explain this: the interest rate effect, the exchange rate and our answer to this question, Wealth Effect.

Wealth Effect means that if prices are lower, that makes people wealthier, as with the same money they can buy more goods or services than they could buy before, therefore demanding more output. So you see, the Wealth Effects is one of the explanations of this inverse relationship between the price level and the aggregate demand.