According to the wealth effect, what occurs when the price level decreases?

The wealth effect refers to the tendency of consumers to change their spending habits based on perceived changes in their wealth due to fluctuating price levels. When the price level decreases, consumers' purchasing power effectively increases because they can buy more goods and services for the same amount of money.

This increase in purchasing power encourages consumers to spend more, leading to an increase in aggregate demand. As people feel wealthier because their money can now purchase more, they are likely to make more significant purchases and investments, further stimulating the economy.

In summary, when the price level decreases, the purchasing power increases, which aligns with the wealth effect, supporting the conclusion that the correct answer reflects this economic principle.