Question

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level a. increases the real value of the domestic currency in foreign-exchange markets. b. decreases the real value of households' money holdings. c. decreases the real value of the domestic currency in foreign-exchange markets. d. increases the real value of households' money holdings.

Answer 1

b

Step-by-step explanation:

When price level increases, consumers become less wealthy and as a result, they demand less of goods and services. This would lead to a decrease in the quantity demanded.

On the other hand, if price level decreases, consumers become more wealthy and as a result, increase their demand of goods and services. This would lead to an increase in the quantity demanded.

This is why the aggregate demand curve is downward sloping