Question

wealth effect: an increase in the price level ______ the real value of money and makes consumers _______, which encourages them to spend _______, this _______ in consumer spending means a ________ quantity of goods and services demanded

Answer 1

The wealth effect holds that as the price level increases, the buying power of savings diminishes and consumption spending falls.

Step-by-step explanation:

The wealth effect holds that as the price level increases, the buying power of savings that people have stored up in bank accounts and other assets will diminish, eaten away to some extent by inflation. Because a rise in the price level reduces people's wealth, consumption spending will fall as the price level rises.