Question

The wealth effect is reflected in:


increases in interest rate to savers


the upward slope in aggregate supply


the upward slope in aggregate demand


the downward slope in aggregate demand

Answer 1

The wealth effect is primarily reflected in **the downward slope in aggregate demand**.

This is because the wealth effect describes how changes in the perceived wealth of households (often influenced by the stock market or housing market) can affect their consumption behavior. When households feel wealthier, they are more likely to spend money, which increases aggregate demand. Conversely, if they feel less wealthy, they may reduce their spending, leading to a downward shift in aggregate demand.

Therefore, the correct answer is the downward slope in aggregate demand.