Economics · Macroeconomics
Consider the following statements about the Pigou Effect and Keynes Effect: I. The Pigou Effect (Wealth Effect) was propounded by Arthur C. Pigou in 1943 to counter Keynes' argument that wage-price deflation cannot lead to automatic full employment. II. The Keynes Effect operates through the channel: Price ↓ → Real Money Supply ↑ → Interest Rate ↓ → Investment ↑ → Aggregate Demand ↑. III. The Pigou Effect can operate in the liquidity trap because changes in real money supply do not affect interest rates in the liquidity trap. IV. Real wealth as defined by Pigou = (Money Supply + Government Bonds) / Price Level. Which of the above statements are CORRECT?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1I and II only
- 2I, II and III only
- 3I, II, III and IV✓
- 4II and IV only
Correct answer
I, II, III and IV
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