AP MacroeconomicsAggregate Demand & Supply
Wealth Effect
The wealth effect is the change in consumption that results from a change in the real value of wealth.
When the price level rises, the real value of wealth, such as money and bonds, decreases. This makes people feel poorer and less likely to consume, leading to a decrease in aggregate demand. Conversely, when the price level falls, the real value of wealth increases, leading to an increase in consumption and aggregate demand.
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