According to the wealth effect, aggregate demand slopes downward (negatively) because

Question

a. lower prices increase the value of money holdings and consumer spending increases.
b. lower prices decrease the value of money holdings and consumer spending decreases.
c. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls.
d. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Answer 1

According to the wealth effect, the correct answer is:

a. lower prices increase the value of money holdings and consumer spending increases.

The wealth effect suggests that when prices fall, the real value of money holdings increases, leading consumers to feel wealthier and thereby encouraging them to spend more, which contributes to an increase in aggregate demand.