According to the wealth effect, what happens to household purchasing power when the price level increases?

The wealth effect suggests that changes in the price level can influence household purchasing power, primarily through the value of assets like real estate and stocks. When the price level increases, the real value of money held as cash or in savings decreases. This decline means that households can buy fewer goods and services with the same amount of nominal wealth. Consequently, their effective purchasing power is reduced, leading to decreased consumption as households feel poorer.

In this context, an increase in the price level directly correlates with a decrease in the real value of assets and, subsequently, purchasing power. Thus, the correct understanding tied to the wealth effect is that as the price level rises, household purchasing power indeed decreases.