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Question $7$ of $22$

Each of the scenarios considers a change in the aggregate price level. Please indicate whether the scenario demonstrates the wealth effect $($also called the real balances effect$)$ or the interest rate effect.

After an increase in the aggregate price level, Jasper realizes that the $$300$ in his checking account can now only buy as many lattes as $$200$ would have bought a year ago. As a result, he decides to purchase fewer lattes.

Abe notices an increase in the prices of goods during the three years he has been tracking his costs. Due to the increase, he decides to use less of his money to finance investment spending for his business.

Micah decides to increase savings in order to finance the remodeling of his home rather than seek a loan.

Ivan notices a decrease in the aggregate price level of $10\%,$ so he decides to spend more of his $$3,500$ in savings than he had originally planned to spend.

Answer Bank

interest rate effect

wealth effect