The Pigou Effect refers to the relationship between real wealth and consumption in an economy, as proposed by economist Arthur Pigou. When the price level decreases, the real value of people's monetary assets increases, leading to a rise in their perceived wealth. This increase in wealth can encourage individuals to spend more, thus stimulating economic activity. Conversely, if the price level rises, the real value of monetary assets declines, potentially reducing consumption and leading to a contraction in economic activity. In essence, the Pigou Effect illustrates how changes in price levels can influence consumer behavior through their impact on perceived wealth. This effect is particularly significant in discussions about deflation and inflation and their implications for overall economic health.
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