Question

According to the wealth effect, when prices decrease, the purchasing power of assets:


decreases and consumption decreases


increases and consumption decreases


decreases and consumption increases


increases and consumption increases

Answer 1

According to the wealth effect, when prices decrease, the purchasing power of assets typically **increases**, as the same amount of money can buy more goods and services. Consequently, this increase in purchasing power can lead to an increase in consumption. Therefore, the correct answer is:

**increases and consumption increases**.