Question

As the price level rises ceteris paribus people holding some of their wealth in monetary form because:_____

a. less wealthy and they buy less.
b. more wealthy and they buy more.
c. less wealthy and they buy more.
d. more wealthy and they buy less

Answer 1

a. less wealthy and they buy less.

Step-by-step explanation:

we are assuming a situation where the price level rises (inflation rises), so anyone holding cash will be able to purchase a smaller amount of goods with the same amount of cash simply because the goods are more expensive. E.g. you purchased 10 goods with $100, but if the inflation rate increases to 10%, you will be able to purchase only 9 goods with the same $100. As inflation rises, people holding cash (or other monetary form) will lose wealth and purchasing power.