Employing the "Keyneisan" approach (legacy model), according to the wealth effect, an increase in the price level (i.e. inflation) decreases real wealth and decreases consumption expenditure.
Step-by-step explanation:
- Employing the "Keyneisan" approach (legacy model), according to the wealth effect, an increase in the price level (i.e. inflation) decreases real wealth and decreases consumption expenditure.
- When there is a lower inflation rate, it causes the real interest rate to fall and stimulates the investment.
- Keynesian economics is a theory of total spending in the economy which is also called as aggregate demand.
- The theory also affects on the output production and inflation.
- He also believed that unemployment is subject to the unpredictable change of aggregate demand and partly because they believe that prices adjust only gradually.