Answer:
As the price level rises, the purchasing power of households' real wealth will fall, causing the quantity of output demand to fall. This phenomenon is known as the wealth effect.
Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to rise in foreign exchange markets. The number of domestic products purchased by foreign (exports) will therefore fall, and the number of foreign products purchases by domestic consumers and firms(imports) will rise.
Net exports will therefore fall, causing the quantity of domestic output demanded to fall. This phenomenon is known as the exchange rate effect.
A lot of fluctuations is often seen in prices of goods. As the price level falls, the purchasing power of households' real wealth will rise, causing the quantity of output demanded to rise. This phenomenon is known as the wealth effect.
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to fall, in foreign exchange markets.
The number of domestic products purchased by foreigners (exports) will therefore rise, and the number of foreign products purchased by domestic consumers and firms (imports) will fall.
Net exports will therefore rise, causing the quantity of domestic output demanded to rise. This phenomenon is known as the exchange effect.
The wealth effect is simply known as the idea that when households become richer as a result of a rise in asset values, example corporate stock prices, they tend to spend more and boast a broader economy.
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