Question

The wealth effect refers to the fact that

Answer 1

Answer:

a. when the price level falls, the real value of household wealth rises, and so will consumption.

Explanation:

A wealth gap is the difference between the richest and poorest citizens living in a geographical location based on the level of their assets and net worth i.e assets minus their debts. Also, these informations about the citizens when generated by the government are typically used for formulating economic policies, plan and financial budgets.

Wealth effect is a behavioral economics theory (psychological phenomenon) which states that an increase or decrease in the value of an asset such as bonds, stocks, property, etc., would result in an increase or decrease in consumer spending respectively.

This ultimately implies that, the wealth effect refers to the fact that when the price level falls, the real value of household wealth rises, and so will consumption. Thus, it is mainly focused on examining how a change (increase or decrease) in personal wealth of a household influences (affects) economic growth and by extension consumer spending over a specific period of time.

In conclusion, when there is an overall increase in the performance of an asset, consumer spending would rise and increase ultimately.