Unformatted text preview: real income or wealth of a consumer diminishes from 25 to 20 even when his money income is constant. Such a wealth effect results in the consumer reducing his demand with a rising price level. Contrary would be the case under the conditions of deflation and falling prices. In that case his wealth effect will be positive and enable him to purchase larger quantities of all goods and services. Hence the presence of the wealth effect continues to maintain an inverse relation between price level changes and aggregate demand....
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- Fall '10
- Inflation, $4, $5, $100, wealth effect, Professor A.C. Pigou