CFA Practice Question

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CFA Practice Question

Suppose you notice that when the price level falls, the real value of your money increases. This induces you to increase your level of consumption. This is an example of the ______.

A. wealth effect
B. interest rate effect
C. real effect
D. income effect
E. international trade effect
Correct Answer: A

User Contributed Comments 7

User Comment
am741 wealth effect induces you to spend more or less money dep on price level.
ehc0791 Why not D ?
The amount of money you have is the same, but you can buy more goods or service. income effect
Your house market value increases, you feel wealth, you spend more, wealth effect.
tractor income effect is when you have more income ... in this case you house appreciates but it does not mean you have more income (e.g. salary) - it just means you have more wealth.
jpducros income effect is used together with substituition effect to determine the number of work hours provided for a certain wage level. It is another chapter concerning supply of labor.
YOUCANDOIT When price level rises, real wealth decreases and ppl end up saving more.

When price level decreases, real wealth increases and ppl end up spending more.

(Reading 23 - p.336)
Shaan23 This is confusing cause it seems to contradict. Main thing is they said a change in price level does NOT shift the AD curve but is movement along it.
Now they are decreasing the price level, Therefor wealth increases, Consumption increases which would therefor increase AD?

Whats going on?

Do all four questions in this section and then answer this question.
Rohule wealth effect its macro and income effect its micro
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