Economics · Macroeconomics
The Pigou Effect describes how:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Government deficit spending creates crowding out in the money market
- 2Higher interest rates stimulate savings and decrease current consumption expenditure
- 3Falling prices increase real money balances (wealth), which in turn increases aggregate consumption expenditure✓
- 4An increase in nominal income leads to higher tax rates and reduces real consumption expenditure
Correct answer
Falling prices increase real money balances (wealth), which in turn increases aggregate consumption expenditure
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